Weathering winter, enjoying green shoots
By Kyle Tetting
A typical spring in Wisconsin includes melting piles of dirty snow, the occasional March or April snowstorm and the spring break trips to get in a week of warmth before the inevitable final cold stretch. Longer days, emerging tulips and buds on the trees speak of the opportunities ahead, even if the present conditions remain chilly and sometimes grey.
Of course, not every spring is typical. This year, we emerge from a much milder winter into early signs of a Midwest spring. Probably a bit early for most spring planting, but without the mountains of snow, there are far more parking spots at the grocery store than the typical March.
Our gentler winter parallels with our recent experience as investors and in the economy. We spent the better part of 2022 and 2023 preparing for an economic and investing winter as the Federal Reserve dealt with inflationary pressures. In part, that winter came.
We dealt with a rolling recession much of the last two years. Rising rates beginning in 2022 dampened housing demand. As we entered 2023, the banking and technology sectors took the brunt of the pain. This past summer, an industrial slowdown emerged. The economic winter came, but it was fairer than feared because it didn’t come all at once.
At the same time, we certainly felt the chill in our investments. The prospects for higher rates shook the stock and bond markets in 2022, and significantly above-average returns in 2023 served only to bring us back toward the earlier path. There was no mild winter for investors the past few years, even if the end result has been far less harsh than expected.
So, while the typical April investing newsletters may point to green shoots for investing in stocks and the economy more broadly, I think it’s fair to say those sprouts emerged months ago. The current climate for investors resembles summer more than spring, with a strong growing season forecast and a steady economic backdrop. Stock prices reflect that optimism.
The risk now – and there are always risks – is to wish away the good days while waiting for the next shoe to drop. There’s a tendency to see the market highs we’ve watched recently as a good opportunity to exit. Instead, studies have shown investors actually tend to do better investing at those new highs compared to just an average day in the market.
While it’s challenging to look at the current valuations on stocks and find them pricey relative to history, that doesn’t mean the current stock market doesn’t have value.
Of course, balanced investors know that their portfolio needs more than stocks. In bonds specifically, we may have a little more corollary with the green shoots of spring.
As the Federal Reserve holds steady with a forecast of three rate cuts across 2024 and potentially more beyond, bond investors stand to benefit from a much more friendly rate environment with a reminder that as the interest rates for newly issued bonds fall, the prices of existing bonds tend to rise. Such an opportunity for bond investors isn’t immediately recognized, especially as so much of the rate conversation is currently driven by decisions at the Fed, though the potential returns in bonds seem increasingly likely.
For balanced investors, the bottom line should be a portfolio that can continue to capitalize on the strong and ongoing opportunities in stocks as a better outlook for bonds helps avoid the urge to head for the exits. As famed investor Peter Lynch put it, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.” Despite their recent struggles, bonds should give us the confidence we need to face near-term uncertainty in the stock market with the understanding that as investors we benefit from sticking around.
Kyle Tetting is president of Landaas & Company.
Learn more:
Balance beats timing (and uncertainty), by Kyle Tetting
Valuations: What stocks are worth, a Money Talk Video with Dave Sandstrom
Investor upsides as interest rates rise, a Money Talk Video with Kendall Bauer and Kyle Tetting
2023 Investment Outlook Seminar, a Money Talk Video with Bob Landaas, Kyle Tetting and Dave Sandstrom
(initially posted March 28, 2024)
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