Review the latest monthly market update from Signature’s CIO, Scott Mitchell.
The month of February brought a reality check for investors hoping for a “soft landing” for the economy. Sticky inflationary readings over the past few weeks have resulted in higher interest rates and rising bond yields, which often lead to lower stock prices. I expect choppy trading over the coming months as investors digest economic data, and mood swings may occur due to elevated uncertainty on inflation, Fed policy, the stock market, and economic growth.
This is as difficult a market to predict as any I can remember. There are two very different, and very realistic possible outcomes. First, the economy slows into a recession, corporate earnings continue to slow, and the stock market faces a continued bear market. The other is that the economy does manage a soft landing, helping corporate earnings and lowering interest rates, which might serve as a tailwind for stock prices.
Despite all of this uncertainty, I do view the recent pullback as an opportunity to buy stocks with a longer-term perspective. It is likely that the next year will create confusing data and bring with it upside runs and pullbacks for stocks. The data on inflation is so confusing, with some numbers running very hot and others very cool, and until we get some clarity, a market run to new all-time highs doesn’t seem likely.. There’s no questioning, however, that the market is showing a lot of strength, suggesting that the lows of this bear market may be in.
As a result of the recent “sticky” inflation readings, Fed rate hike expectations have moved substantially higher. This shift in expectations is pushing bond yields higher, which is a headwind to stock prices. For example, the market is now expecting the Fed funds rate (the short-term rate that the Federal reserve controls) to peak at 5.46%, while the expectation was only 4.88% just a month ago. But just as the outlook may have been too rosy last month, this current adjustment in the other direction may be too pessimistic. We do believe that the Fed will be successful in bringing inflation down, but clear and convincing progress may take time and cause some economic and stock market weakness.
On top of the economic uncertainty, corporate earnings expectations have been dropping. Generally, this is not good for stock prices, as prices tend to follow earnings. Stay tuned, but I do expect corporate outlooks to continue to be lowered, for the most part. A lot of that has been factored in, but I can’t be sure that more isn’t to come.
One positive development out of all of this is that interest rates have risen dramatically. For savers, money market rates are almost as high as I can remember. If you are considering putting money away for longer, either through CDs or high-quality bonds, interest rates appear attractive to me. I am aware of money market mutual funds yielding over 4%, and CDs that have annual yields near 5%.
I’m sure you won’t forget, but tax day is coming soon. The deadline this year is April 17. That’s also the last day to contribute to IRAs, so make sure you’ve taken care of all of that.
In conclusion, we expect to see volatility in the market over the coming weeks and months. I think we’re closer to the end of the bear market than the beginning. By staying diversified and focusing on long-term goals, we believe investors can weather the storm. Thank you for your continued support and trust in us.
As always, these opinions are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made.
Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.