Financial Markets Are in No Man’s Land

Financial Markets Are in No Man’s Land

Financial markets have no clear direction, trapped in No-Man’s Land until at least the next Federal Reserve meeting on May 3rd.  Depending on the economic data points of the day, stocks are gyrating up and down within a narrow band without clear direction or conviction. Such is a time when opinions and predictions bounce markets until enough data exists to prove one right or wrong. There are several directions for future economic and market performance that need to clear up.

The First Compass is monetary policy – driven by the Fed moving interest rates and the supply of money.  It is expected that rates will be raised another ¼ percent in May, and then a pause announced as the toll previous increases are having on the economy becomes clearer in the data.  This includes inflationary pressures receding, employment growth cooling, and the availability of credit shrinking. Tighter financial conditions weigh on small businesses, who employ 2/3 of all workers. The possibility of recession has increased, and slower corporate earnings – the primary basis for stock valuations – are expected. 

Secondly, virtually every recession indicator is flashing red, from manufacturing data, commodity prices, and a very inverted yield curve.  But consumers will determine if a recession occurs and how severe it might be.  Will consumers keep spending while bank credit is reduced, the economy slows down, confidence is eroded, and a true recession occurs?  No one knows.  So, today we are stuck in No Man’s Land. 

There are clear signs that once the corner does turn, the recovery in stock prices could be fairly swift. While this all sounds ominous, the reality is that a possible recession should be shallow and short.  Despite potentially slower short-term earnings, corporate and household balance sheets remain quite strong.  Assuming this persists, any damage due to recession may not foster further reduction in stock prices.  Earnings also historically prove stronger than pessimists fear.  Finally, investor sentiment and positioning is downright despondent.  Troughs in sentiment tend to precede strong equity returns.  We are currently in the 16th consecutive month of negative market sentiment.  The Great Financial Crisis had a span of 18 months.  With the second longest period of negative sentiment in place, and cash accounts flush with $3-$4 trillion to invest, there will likely be great demand for equities when sentiment turns.

Barring a major unforeseen event, we expect a turnaround later this year as markets “look through” to next year.  In the ten prior periods when markets were up in the first quarter after a negative year, the year finished higher in all of them.  Further, 15 out of the last 16 periods produced positive annual returns in years when the market was up greater than 5% in the first quarter.  We believe the stage is set for the market to accelerate into year-end once earnings and consumer strength pictures clear up.

So, what parts of the market are best positioned for growth? 

Enjoy today and tomorrow, and let us do the worrying!

Contact us to discuss your situation if you’re interested in our time-horizon strategies.

Where is the market is headed?

Where is the market is headed?

This year’s market declines have largely been a valuation “correction.” The price-to-earnings ratio (P/E) of the S&P 500 Index has declined about 25%, and stock prices are down more than 20%. We could see another decline phase based on company fundamentals (profits and losses).

What will company earnings be going forward? Projections for S&P 500 future earnings average $235/share. This will be more difficult with the Fed slowing the economy. Analysts have recently begun lowering estimates while ignoring the impact of a strong Dollar. Roughly 40% of S&P 500 company earnings are from overseas, which get converted into Dollars for reporting purposes. When foreign earnings are converted to Dollars this season, it could add to relative earnings declines and, therefore stock prices.

It is important for investors to know that historically the P/E ratio bottoms well before earnings do, roughly 6 months earlier. In fact, in the past 100 years of market cycles, the P/E ratio has already rallied 20% by the time actual earnings bottom out. The market is a forward-looking mechanism – one that discounts information more efficiently than any person or computer can. Waiting until economic data and earnings data reflect the improvement in underlying fundamentals to investing means missing out on the best returns.

We should be only a few Fed meetings away from a pause in rate increases, so the low point for the market could be sometime over the next six months. It is a constantly moving target, but that is our best guess given what we know today. No one ever said this was easy, which is why successful investors often partner with an advisor. We remain disciplined while investors may get emotional. We are more likely to get aggressive at the right time and take advantage of these short-lived low stock prices.

If you’re interested in our layered risk approach that brings clients greater peace, contact us about your situation.

We encourage our clients to continue living life without stressing over market conditions.  Allowing us to focus on the markets and our clients to focus on enjoying life!

So, enjoy today and tomorrow, and let us do the worrying!

Contact us to discuss your situation if you’re interested in our time-horizon strategies.

Try Not to Get Your Toes Stepped on by the Fed

Try Not to Get Your Toes Stepped on by the Fed

Our readers know that last Fall we reduced client stock exposure in light of what we thought was an overvalued market. For most clients, we allocated the proceeds to real estate, which has been their best-performing investment this year. We reduced stock exposure again early this year, anticipating higher interest rates and their impact on stock prices.

Our Approach

This “one foot in” approach kept growth accounts partially invested in case the Fed changed course and ignited a rocket ship rally. However, we now believe that instead of a pivot to reducing interest rates, the Fed will stay its course for the next two or three meetings and then pause rate increases.

Fed policy takes time to work through the financial system before getting the desired result – inflation on a course returning towards their target 2%. Inflation came from a demand imbalance which is correcting with supply improvements. However, with inflation hovering near 8%, there is still a long way to go without creating a recession.

Tamping down consumer demand remains challenging as most American household savings went up during COVID. This strength of the consumer will hopefully reduce the depth of a potential recession.

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We encourage our clients to continue living life without stressing over market conditions.  Allowing us to focus on the markets and our clients to focus on enjoying life!

So, enjoy today and tomorrow, and let us do the worrying!

Contact us to discuss your situation if you’re interested in our time-horizon strategies.