Stock Market Risks & Opportunities Today
During a Denali expedition in 2017, following a 9 day confinement at 14,200 foot camp due to a severe cold storm that saw a handful of climbers with frozen appendages rescued by helicopter, a climbing day arrived! To our dismay and disapproval, the expedition’s head guide decided we would not ascend the head wall to cache supplies on the West Buttress Ridge due to perceived avalanche danger from the 8 inches of snow that accumulated in the night. Retrospective analysis concluded three things: 1) the extreme cold air and constant sunlight over 9 days had consolidated prior accumulations into a sheet of ice, leaving great climbing conditions with little probability of avalanche, 2) the teams which climbed that particular day safely advanced in near-perfect conditions, and 3) that guide decision squandered our team’s only remaining opportunity to summit. Erring on the side of safety and conservativism is sometimes prudent, but success requires the climber to identify opportunities to ascend the mountain, and to do so! Investing is similar to climbing in this regard. Let’s identify the bigger risks and opportunities in the stock market today, in hopes of gaining insight as to whether this is a “hunker down” or “rope up” moment.
Big stock market negatives today include:
The credit market is tightening, which generally accompanies recession and triggers bankruptcy for heavily indebted businesses. When credit gets too tight, a systemic crisis can erupt. So far the credit market has tightened modestly.
After improving substantially in Q1, market breadth is declining. Broad advances in stock prices are sustainable, but narrow advances, when indexes rise as the price of most stocks in those indexes fall, are a warning. So far breadth declines seem to be indicating a mere pause in the advancement of stock prices.
The yield curve warns of a coming economic contraction. The most reliable recession indicator with a near perfect 70 year track record is flashing red. Some notable investors suggest yield curve warnings are no longer reliable due to the Fed’s predominant ownership of outstanding Treasury bonds. So far the yield curve warning of a deep and lengthy contraction has not been substantiated by other economic data.
Big stock market positives today include:
The Fed has indicated a rate pause, and that rates approach a cycle peak. Less bad conditions often indicate major reversals, especially pertaining to the cost for businesses to access operational credit.
Inflation continues to decelerate. “The invisible tax” is generally punishing to stock prices when rising, as was the case in 2022, but again, less bad conditions can present enormous opportunity for the nimble, as most investors wait for more certain indications to buy.
The S&P500 remains above its 200 daily moving average, historically a time to buy stocks.
A mountain of cash remains on the sidelines, awaiting more certain indications to buy, but many of America’s greatest investors are carefully positioning themselves in front of it.
In the past century there has not been a single down year for stocks in a post, mid-presidential election year. This could prove arbitrary, but 100 years is a long time.
In conclusion, while significant risks remain for stocks, the positives look more influential, less uncertain, and more numerous than the negatives. This does not appear to be a time to hide from the storms in your tent! Great businesses with large free-cash flow, and which dominate their respective industry and pay consistent dividends are selling for the lowest valuations in years. Buying great businesses after big sell-offs, like in 2022, is generally a very wise thing to do. If you ever see every stock indicator flashing green, STOP, for the real buying opportunity has definitely passed you by! Stay vigilant. Stay diversified. Focus on quality. Look for screaming buys in leading sectors and industries.
Think about it, Shaun.
“Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.” ~Eccliastes 11:2
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.
All investing involves risk including the possible loss of principle. No strategy ensures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company. Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
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