This has been a challenging decade thus far for investors with the pandemic induced Bear market of 2020, albeit surprisingly brief given the work-from-home mandates and supply chain problems. The 2022 Bear Market was a result of lofty market valuations and the FED’s aggressive rate hiking cycle. Consumer spending[01] has sustained this market but with excess pandemic savings exhausted and rising credit card delinquencies[02], the consumer may finally be tapped out!
Massive government stimulus, which kept the economy from falling into a deep recession[03], along with on-going supply chain issues[04] resulted in the highest inflation in decades. To combat high inflation, the FED initiated the most aggressive rate hiking cycle in decades[05] that caused a precipitous drop in the bond market. But with higher rates, bond funds may once again provide a viable income stream and possible appreciation as rates recede with pundits expecting rate cuts to commence at the September FOMC meeting[06]. Lower quality companies are finding it difficult to service their debt in this high-rate environment[07]. Small Cap stocks also depend on borrowing to support operational expenses[08] and they too should benefit as interest rates recede.
Because of the historic low unemployment rate, companies have had to compete through higher wages in the hiring process, especially in the service sector[09]. The resilient labor market has caused inflation to be sticky forcing the FED to hold short-term rates higher than long-term rates for the longest yield curve inversion in history[10]. Historically, an inverted yield curve has been a harbinger of recession[11] but it’s hard to have a recession with such a resilient labor market. Until recently the unemployment rate had remained near historic lows but has recently risen to 4.3%[12] as the Leading Economic Indicators continue to drift lower[13] with the slowing economy.
A handful of Artificial Intelligence related stocks, referred to as the “Magnificent 7”, propelled the S&P 500 index to new all-time highs with lofty valuations[14], especially in technology and the large cap growth sector. As company’s report earnings, investors are coming to the realization that the Artificial Intelligence mania has been more of an expense and less of a revenue generator[15], which may take the froth out of those stocks. Ultimately, the Artificial Intelligence mania will widen from “creators” to “adaptors”[16] with the winners being those companies that can unleash productivity enhancements and lower costs by using the technology.
Commercial Real Estate continues to struggle from the effects of the pandemic[17], especially office and retail space. Housing affordability[18] struggles from high interest rates and lack of inventory that has kept home prices high. Even with significant appreciation of existing homes, families with low mortgage rates are reluctant to move[19] because of high interest rates to finance a new home.
The labor market and economy have been stubbornly resilient[20] causing the FED to hold interest rates higher for longer to tamp down inflation[21]. With bond yields significantly higher[22], there is a less compelling reason to add equity risk to a portfolio. Given that this is an election year in more than sixty countries[22], the ever-changing geopolitical environment may bring surprises.
Given geopolitical tensions and lofty market valuations, Caution is the Watchword! The verdict is still out as to whether there will be a recession or soft landing[24][25][26]. The best defense is a highly diversified portfolio in conjunction with a well-articulated management strategy. If you’re concerned about market valuations, a member of the Iron Belt Partners Team will gladly discuss any concerns with you. We can be contacted via phone at (724) 493-9473 or via Email at:
Lindsay M. Turchetta LTurchetta@lpl.com
John D. Martin JDMartin@lpl.com
Working as a team to better serve our clients!
This communication is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. You should consult your tax, legal, and/or financial advisor prior to making any financial decisions. The views expressed here are those of the authors, John Martin & Lindsay Turchetta, and not necessarily those of LPL Financial. Information is based on data gathered from what are believed to be reliable sources. The opinions and other information contained in this article are subject to change continually and without notice of any kind. Forward-looking statements are subject to assumptions, risks, and uncertainties, which change over time and may not happen. Past performance does not guarantee future results.
Investments are not guaranteed and are subject to investment risk including the possible loss of principal.
Past performance does not guarantee future results.
The index references herein are unmanaged and cannot be directly invested in.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio and diversification does not protect against market risk.
Securities and investment products and services offered through LPL Financial, member FINRA/SIPC.
Iron Belt Partners is a name used by independent advisors associated with LPL Financial.
[01] Source: “American spending has kept the economy going since the pandemic” on msn.com By Christopher Hickey
[02] Source: “Delinquencies are up as credit-card debt hits a record $1.08 trillion” on msn.com By Zoe Han
[03] Source: “A Turning Point” on LPL Research By Marc Zabicki
[04] Source: “Drought That Snarled Panama Canal Was Linked to El Niño” on nytimes.com By Raymond Zhong
[04] Source: “What are the impacts of the Red Sea shipping crisis?” on jpmorgan.com By Nora Szentivanyi
[05] Source: “The Most Aggressive Tightening Cycle in Decades” on Statista.com By Felix Richter
[06] Source: “Traders see the odds of a Fed rate cut by September at 100%” on cnbc.com By John Melloy
[07] Source: “The Fed Is Killing Zombies” on msn.com By Michael A. Gayed
[08] Source: “Will Small-Cap Stocks Ever Catch Up?” on Morningstar.com By Sarah Hansen
[09] Source: “Forecasts for April CPI Report Show Continued Sticky Inflation” on Morningstar.com By Gabe Alpert
[10] Source: “Yield curve now flagging recession for longest time on record” on Investing.com
[11] Source: “US yield curve nears flip with jury out on recession signal” on Reuters.com By Davide Bruscia
[12] Source: “Sharp slowdown in US job growth boosts unemployment rate to 4.3%” on Reuters.com By Lucia Matakana
[13] Source: “Leading Economic Index® for the U.S. Fell Slightly in June” on prnewswire.com By The Conference Board
[14] Source: “'Magnificent 7' Widens Gap With Rest Of S&P 500” on businessinsider.com By Neil Dennis
[15] Source: “Stocks tumble as AI jitters rattle Wall Street” on Bloomberg.com By Rita Nazareth
[16] Source: “The A.I. Boom could shift from ‘Creators’ to ‘Adopters’” on msn.com By Kevin Gordon
[17] Source: “How COVID Impacted Commercial Real Estate” on WealthManagement.com By Thomas Foley
[18] Source: “US Housing Market Grapples with Record-Low Affordability” on msn.com By Emmanuel Abara Benson
[19] Source: “How Do Rate Cuts Affect Housing Affordability?” on richmondfed.org By John Ostracon
[20] Source: “How long can consumers keep the economy humming” on msn.com By Harold Maass
[21] Source: “Interest Rates Will Stay Higher for Longer” on investopedia.com By Diccon Hyatt
[22] Source: “Long-term perspective on markets and economies” on capitalgroup.com By Martin Romo
[23] Source: “Global Election in 2024 – Statistics & Facts” on statista.com By Aaron O’Neill
[24] Source: “The U.S. Seems to Be Dodging a Recession” on nytimes.com By Ben Casselman
[25] Source: “Economy still growing, ISM finds, in counter to fresh recession talk” on msn.com By Jeffry Bartash
[26] Source: “Recession forecasts crushed as economy defies doomsayers” on msn.com By Martin Baccardax