Judging Market Strength and Direction Today
In the great endurance sailing races of the world, competing teams must continuously judge the winds and engage the race, even during extreme weather events. As a mountaineer, many times have I thanked God I was not suffering in a high mountain storm, but hunkered down in a 25 below bag sipping tea; but that luxury excludes racing teams, and this gives me both admiration and pity for sailors! Investing often resembles endurance sailboat racing in this respect, so let’s investigate what present weather patterns are saying about the strength and direction of the financial markets today.
Negatives
Market sentiment has been registering “extreme greed” in recent weeks, a precursor to the market stumble now underway. Young and healthy bull markets climb “the wall of worry” in widespread fear and pessimism, emotions which may return expediently amidst renewed volatility and the most forewarned recession in history.
New warnings the banking crisis isn’t over could prove destabilizing if true, a probability given where interest rates reside today. That said, big U.S. banks are incomparably better capitalized than in 2008, and any further trouble increases the probability the Fed, which fears crisis and deflation, will stop raising rates.
The inverted yield curve (and its recession warning) and the tightening credit market are noteworthy, but the former hasn’t been substantiated by alternative data, and the latter has thus far been modest.
Positives
Inflation continues to decelerate, and “less bad” conditions present an early impetus for higher asset prices.
Interest rates approach a cyclable peak, a second Fed “pause” may be in order for the September meeting, and reputable sources suggest the Fed is altogether done raising rates.
Unemployment remains low, labor remains scarce, and so far, the most forewarned recession in history remains elusive.
Considering historical valuations, stock prices appear to be fairly priced today.
The S&P 500 remains considerably above its 200 “daily moving average”, widely regarded as a time to buy stocks.
These factors suggest it is not time to throw our tackle overboard to lighten the ship for turbulent seas! Rather, take a long-term approach with a strong focus on quality, both on the equity and fixed income side, and compound returns with systematic purchases and the reinvestment of all distributions. Understand your investment objective and risk tolerance, and be sure your asset allocation reflects both.
Think about it, Shaun.
“Go to the ant, O sluggard; consider her ways, and be wise. Without having any chief, officer, or ruler, she prepares her bread in summer and gathers her food in harvest.” ~Proverbs 6:6-8 ESV
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. The economic forecasts set forth in this commentary may not develop as predicted.
All investing involves risk including the possible loss of principle. No strategy assures success or protects against loss.
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