Summer calm belies uncertainties ahead
By Kyle Tetting
Despite an S&P 500 decline that topped 1,000 points earlier in the year, mid-June marked a reversion back to a narrower range of trading for stocks. The S&P has spent the last month and a half bound between 3,750 and 4,000. The volatile days of 1% or more price movements have been fewer and farther between as well.
Looking beyond mere broad measures, I have been encouraged to see growth stocks retake some leadership. Investors concerned about the future may be less willing to pay for potential earnings growth, but growth stocks have rallied nicely since the June 21 summer solstice, outpacing the more defensive names that had led for most of the first half of the year.
Of course, stock prices are a function of expectations. Here too, I’ve been pleasantly surprised. Earnings forecasts for the next 12 months have improved modestly the past couple of months, and full-year 2023 and 2024 earnings forecasts still show 7-8% growth each year, according to data from Refinitiv. The second-quarter earnings season carried some potential for downward revisions. So far, we’ve seen some shifting expectations, but the broader outlook of cautious optimism remains intact.
Add in the broad economic gains of the first half of the year, and the overall picture looks better still. Private employment surpassed pre-pandemic peaks. Industrial production showed signs of growth, with plenty of potential remaining as companies continue to fortify supply chains. And, despite the generally poor disposition of consumers, retail spending continued to grow.
That’s the good news. Despite the generally sour mood on the heels of significant declines in stock and bond prices, broad market measures are stable, and economic indicators have continued to show signs of growth.
But even with some renewed optimism, it’s never all good. Notably, inflation continues to erode purchasing power, the war in Ukraine rages on, and subvariants of the coronavirus and other infectious diseases continue to wreak havoc. Each of these, and the necessary responses to them, causes problems that are not resolved overnight. What’s left, then, is a need for time.
Amid the good, bad and ugly, investors are left to wonder what comes next. Is now the time to take more risk or less, add to stocks or firm up the mattress with another infusion of cash? Frustratingly, the answer continues to be, “It depends.” It depends on who you are, what you need and how what you have fits into the answers to those questions.
For most, this is a stay-the-course moment. In the absence of easy answers, the best likely short-term outcome for stocks is that they muddle along a while. Inflection points are hard to come by when the best answers are time. And, while stocks are much more reasonably priced than they were, most portfolios have maintained healthy allocations. As a result, it just isn’t necessary to add to risk right now.
Long-term, the story for stocks is far more compelling. There are deals to be had, though they may remain deals as long as the current problems persist. It matters little if prices get better or worse tomorrow when your outlook is for 2027 or beyond. And this is where bonds enter the conversation.
Despite the recent weakness, I’m more optimistic about bonds, not less. The summer months have seen bonds return to the more traditional defensive role they typically play as interest rates finally offer something to the bondholder. Very near-term, actions by the Federal Reserve will cause some volatility, but it finally appears that investors are getting something out of this slice of the portfolio.
While the relative calm of summer has been nice, the next few months are likely to bring plenty of new information. We’ll be watching how inflation responds to the Federal Reserve’s actions and tougher year-over-year price comparisons. We’ll follow developments on the coronavirus, any resolution in Ukraine and countless other factors. All of these have the potential to add to uncertainty. As a result, the summer calm is a great opportunity to reassess balance and ensure you’re properly allocated for both the near-term uncertainty and the long-term opportunity.
Finding direction in the fundamentals, by Kyle Tetting
Staying the course is not staying still, by Kyle Tetting
When Should I …rebalance my portfolio? by Art Rothschild
How bonds fared as Fed has raised rates, a 2016 Money Talk Video with Kyle Tetting
Recessions: Uncertainty suggests balance, a Money Talk Video with Kyle Tetting
(initially posted July 27, 2022)