This Week’s “Noise”
There is not a lot of market moving news this week. Federal Reserve minutes are due out on Wednesday. Also, we expect Federal Reserve Chairman Powell to speak later in the week from the Jackson Hole conference.
Expect lots of coverage of the Democrat convention this week.
Current Market Outlook (6 to 12 months)
Market
We have seen some shift away from the few large stocks that have dominated the market. We see this continuing through year end.
Economic
A soft landing seems to be underway. The latest data and comments have indicated the Fed may have a path to cut rates. Although the odds of a cut in 2024 have greatly increased we don’t expect the Fed to march back down to near 0%. If that is the case the economic picture is much worse than anyone expects.
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 a 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 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. Total bond returns should be strong as the Federal Reserve lowers rates over the next two years.
"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets."
— Peter Lynch
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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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