This Week’s Noise
Lots of Fed speak this scheduled this week. What exactly is said and how it will be interpreted is anybody’s guess. What would be expected is talk of no more rate increases; anything to the contrary will be an unforeseen and unwelcome surprise. Market is still pricing in less than 50 bps of cuts this year (FactSet)
Another reminder: As humans we are terrible at conceptualizing the rate of inflation. Typically, we remember the hard cost of XYZ good and not how much the cost has risen in a given time frame. This sort of direct comparison doesn’t bode well for intuitively evaluating a slowing rate of inflation.
Current Outlook (6 to 12 months)
Market
The stock market has started out the year very strong. The recent resurgence (S&P up 4 straight weeks) leading to new highs seems broad based and not solely concentrated at the top few stocks. With earning season coming to a close, we are seeing consolidation in S&P returns going forward with the 493 smaller companies converging with the Magnificent 7. The largest 7 players have had very divergent paths YTD as opposed to the almost lockstep rise last year. If the US economy holds up with slower than trend growth (we are seeing strong guidance) and inflation recedes, the stock market could experience a “melt up”. This means investors will pile in out of fear of missing out (“FOMO”). Little talk of the Election in Nov, commentary and handwringing will likely begin to increase over the summer.
Economic
Margins have been key driver of better-than-expected- earning (Goldman Sachs). This is leading many to believe that the macro view is still strong and has not yet provided a narrative for Fed easing.
“Stagflation” has been the talk of the week… of last week. It seems this fear is passing quickly. If you do hear talk of it in the future, remember: Stagflation requires a few key elements: high stubborn unemployment, high stubborn inflation (typically from higher commodity prices), and low growth tied to low productivity gains. We have a new record for unemployment (under 4%) (FactSet), inflation is coming down (albeit not as fast as many hope), commodity prices seem to be responding to potentially slower growth in ’24 vs ’23, and productivity shows limited signs of slowing (Artificial Intelligence anyone?).
Long-Term View (4 to 7 years)
Long term we believe the US economy will continue to outperform other world economies. This is supported by combination of re-shoring manufacturing, new investments resulting from the Inflation Reduction Act, US energy independence, and higher productivity due to the implementation of Artificial Intelligence (AI) software/systems.
We started 2023 predicting the broad stock market would return to the old highs in one to two years. It took only one year. We believe the US stock market should be 40% to 60% higher by the end of 2028. A S&P 500 index of 7,000 to 8,000 appears possible.
Bonds have re-emerged as an important part of asset allocation as yields have risen. We expect a diversified bond portfolio to produce returns 3% to 5% above inflation for the next 5 to 7 years.
“How many millionaires do you know have become wealthy by investing in a savings accounts? I rest my case.’’ - Robert G. Allen, author and well-known Investment Advisor
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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
Any opinions are those of John O’Hare II and not necessarily those of Steward Partners. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
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Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally, the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.
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