By Tim Courtney, Chief Investment Officer
Recent headlines have focused on the resilience of the U.S. stock market despite facing numerous challenges, including geopolitical tensions, inflation pressures and mixed investor sentiment. As we delve into the details, it's clear that interpreting market signals has become increasingly complex.
The stock market has absorbed a series of negative economic updates, starting with a rather unfavorable inflation number for March1 and escalating tensions overseas in Israel and Ukraine. Yet, surprisingly, most asset classes are showing positive year-to-date returns. In fact, the American Association of Individual Investors recently reported that the bulls outnumber bears by 19% in markets.2 In markets we often receive conflicting data that can be noisy, so examining markets with a balanced view is crucial.
Right now, equity markets, and particularly large cap tech names, are quite expensive while the small caps and value stocks are slightly negative.3 This could point to concerns of a looming slowdown, with investors looking for defense and protection in those stronger names. However, the bond market is painting a conflicting picture. Currently, high quality bonds are slightly negative year-to-date while weaker bonds and fixed income notes are positive year-to-date.4 This is puzzling because if we are headed into a recession, why would the market price lower quality bonds better than higher quality bonds?
On the policy front, mixed signals also makes forecasting markets even more challenging. It seems that many investors are leaning towards a bullish outlook, driven by a desire for higher returns. This optimism could be fueled by the stimulative monetary policies we’ve seen over the last four years, which is making its way into markets, keeping Gross Domestic Product growth higher and stock returns better. As investors, our recency bias often leads us to expect that these trends will continue indefinitely. However, we must be wary of the side effects these policies have caused, such as increased national debt and inflation pressures.5
As we know, the only constant in markets is change and history shows that shifts can occur unexpectedly and can be jarring. The period between 2010 and 2020, for instance, conditioned investors to a low inflation environment, making the recent inflation spikes seem like temporary aberrations rather than a new trend.
Moving forward, it's crucial for investors to remain adaptable. As we've seen, market sentiment can pivot quickly; what's bullish now might turn bearish as new data comes to light. While we remain cautiously optimistic, we must acknowledge the complexities and uncertainties in today’s market environment. If you have any questions, please feel free to contact your Exencial advisor.
Sources:
- Barron’s (4/11/24) – CPI Report: Inflation Comes In Hot, Dashing Hopes for Fed Rate Cuts
- The Wall Street Journal (4/16/24) – Market Reaction to Iran Attack Tells Us Stocks Aren’t in a Bubble
- Morningstar (4/30/24) – Small-Cap and Value Stocks Are Undervalued
- Morningstar (4/30/24) – Returns of Fixed Income Indexes
- AP News (1/2/24) – US national debt hits record $34 trillion as Congress gears up for funding fight
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