By Maurice Stouse, Financial Advisor and Branch Manager
“If you want to know the past, look at your present. If you want to know the future, look at your present” – Marcus Aurelius
Reports came out this past week over the continued resilience of the US economy. GDP growth for the second quarter was 2.4%.
According to the Associated Press, that was led by a strong increase in business spending and continued strength in consumer spending. This is in the face of 11 Federal Rate hikes in the past 17 months. Inflation has continued to decline and is now down almost 70% in the past 12 months.
We have seen it before, the quote from the great John Templeton: The four most expensive words in investing are: “This time it’s different”. Indeed, we agree, and this time it is not different. The stock market sank to its lowest level in October in 2022. It has since rebounded quite substantially. That is right in line with past slowdowns or declines in earnings brought on by higher interest rates, inflation, and a slowing economy.
It has been interesting and concerning at the same time, the rapid rise in inflation over most of 2022. And what goes up often comes down – we have seen inflation come down 70% over the past 12 months. Raymond James, in its most recent edition of Investment Strategy Quarterly, presents two scenarios which can drive inflation: Supply push inflation or demand push inflation. Inflation pushed by an interruption or decrease in production can raise prices. Stimulated demand brought on by a significant increase in the money supply can drive inflation. We may have just experienced the two simultaneously.
The interesting thing about inflation is that it was mostly nonexistent from 2010 to 2020. That was with an abundant supply of money and a strong economy for the most part. How could inflation have been so tame? Goldman Sachs points out that two key factors were 1) the low cost of energy during that time and 2) the continued advances in automation and other technological innovations that drove the cost of doing business out of the system. It was quite incredible to see the low cost of money and low inflation. The question, as we hear nonstop communication about artificial intelligence, or AI, is that about to happen again and at an even faster rate? The impact of technological advances cannot be overstated in our opinion. They not only drive costs out of the system as Goldman points out, but they also create new opportunities, industries, and jobs. Of course, some jobs go away (think telephone operators or typists) but are typically replaced by more and higher paying jobs. Is the market seeing that? We think so. Goldman Sachs also shared some numbers to further illustrate these points. In the year 1850, two-thirds, or about 66% of the workforce, was devoted to agriculture or food production. The leading cause of death at that time was malnutrition. Today, less than 2% of the workforce is dedicated to food production – and productivity, or output, has never been greater. One of the leading causes of death today is a diet that is too rich.
Even though most stocks are up only slightly in 2023, many of these companies are coming out of earnings slumps and, like past growth spurts in stocks, they have recovered after hitting lows. The markets, however, present a different picture. At this writing the S&P 500 index is up almost 19% ytd, the Dow, 6.5% and the NASDAQ, 35%. Investors should take note that a small number of stocks, less than ten, have driven most of the performance of S&P and the NASDAQ. Taking those out leaves those indexes with a much different result.
The same can be said for so-called market valuation: looking at the price to earnings ratio (PE) of the S&P. Historically that number has been 16 to 1. Most recently it is 26 to 1, indicating a somewhat overvalued market. If you experiment and take out the small number of outperforming stocks, you will find that ratio drops down somewhat and makes it slightly undervalued. Throughout most of July the market seemed to be responding to that and the larger group of stocks performed quite strongly and many of those firms have been reporting their second quarter results, which are proving to be better than expected.
We are also encouraging investors to look more closely at bonds or fixed income investments. If the Fed is close to or at the end of its rate hike efforts and if inflation continues to wane, locking in yields for longer term than short term CDs and money markets might make a lot of sense. It can diversify or reduce risk to a portfolio, and it can be a source of income as well. Cash rates are at their highest levels in well over a decade, however we remind investors that these rates are intended for a very short-term time horizon.
If you haven’t reviewed your portfolio and or reassessed the big three: investment objective, risk tolerance, and time frame, contact your advisor and do so today.
Diversification and asset allocation does not ensure a profit or protect against a loss. Holding investments for the long term does not ensure a profitable outcome.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system.
The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal.
Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
Maurice Stouse is a Financial Advisor and the branch manager of The First Wealth Management/ Raymond James. Main office located at The First Bank, 2000 98 Palms Blvd, Destin, FL 32541. Phone 850.654.8124. Raymond James advisors do not offer -tax advice. Please see your tax professionals. Email: Maurice.email@example.com.
Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, and are not insured by bank insurance, the FDIC or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. The First Wealth Management and The First Bank are not registered broker/dealers and are independent of Raymond James Financial Services.
Views expressed are the current opinion of the author and are subject to change without notice. The information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results.