The late great baseball legend, Yogi Berra, is credited with this quotation: It is tough to make predictions, especially about the future! If there were a perfect field for applying this, investing must be it.
Our viewpoint (and that of our favorite economists at First Trust Advisors, LP) remains that the stock market will suffer additional losses before we can look through the recessionary period and into the rise of production and profits. We had two quarters in 2022 of zero growth of national output, we are slowing in production and particularly in terms of corporate profits, but the S&P 500 stock index ignores all that. It has risen by 8.33 percent through Friday, May 5.
The Dow Jones Industrials Average and the Nasdaq 100 indexes are higher by 2.25 and 21.5 percentages higher. The Russell 2000 (Small Cap) stocks are up less than a half percent. Meanwhile, the Commodities index (GSCI) is lower by 8.8 percent despite continuing inflation. Almost every individual investor tells me they are also bearish. How do you explain these temporary results?
Begin with the important fact that indexes are collections of stocks with quite different characteristics and behaviors. The technology stocks, beaten bloody in 2022, have risen from their depths quite nicely even though many still being very expensive by usual measures.
On the other hand, energy companies are easily the most profitable now. It may be the ESG factor, but that sector registers a price drop of over 5 percent through last Friday. Other losers include Financials, Real Estate and Utilities, from worst to better.
Who will be most correct by year end, the Bulls or Bears? A more important question for most people right now is the level of risk they are willing to accept. Regardless of the uncertainty about raising the debt ceiling, short term loans to our federal government still carry very low risk. Currently three-month Treasury Bills pay an annualized rate of over 5 percent.
The Bears also happen to have statistical history on our side. Often, stocks will fall in value during the period between the Spring high point and November 1. Last year, the drop was over 16 percent. However, all such trends ebb and flow. This tendency has not been as reliable in the past half dozen years.
In our case, we have put our clients’ money to work on the safer side. Over 58 percent is in the short-term Treasuries, higher yielding money market funds or cash. The next largest portion is held in international stock mutual funds which are generally trending higher than diversified US stock funds.
If we are incorrect about the next few months, we will still have positive returns and live another year to earn higher returns. Preserving principal by losing less or earning somewhat less with much less risk will enable the turtle to win the ultimate race. However, as you should know by now, past performance is no guarantee of future results!
(The advice is general in nature and not intended for specific situations)