October has gotten off to a rocky start, as concerns of government shutdowns, COVID, debt ceilings, inflation, supply chains, and infrastructure bills have dominated the news. While all of these certainly can create volatility, I believe that stocks will continue to be a good investment. A healthy consumer, strong economic growth, strong earnings reports from corporations, and, most importantly, monetary stimulus, will likely overcome the impacts I mentioned above.
Historically speaking, the recent pullback is normal, and it looks to me that there is technical support for the stock market not too far below the current S&P 500 level. The Federal Reserve stimulus will likely continue to keep plenty of liquidity in the financial system, providing cash that might be used to buy stocks or other investment options. Underneath the surface, the average stock is gaining strength against the largest S&P 500 stocks, indicating that the demand for stocks might be broadening, which I believe, is a good sign.
For sure, there are supply chain issues, making it hard for some products to get to the market. Anyone who has furniture shopped recently can relate to this. There is also plenty of demand, and these two factors are creating inflation. The Federal Reserve uses the word “transitory” to describe its inflation projection, but I think we are seeing some signs, especially in wage growth, that inflation may be around for a while. Thankfully, there are asset classes and stock sectors that I believe may perform well in an inflationary environment, and we’d be glad to discuss which ones might be appropriate for your investment portfolio.
If anything, I believe that many Wall Street analysts are too conservative in their projections for corporate profits. Since stock prices usually follow corporate earnings (both to the upside and the downside), I believe that there is still room for the stock market to go higher. Perhaps it won’t move at the breakneck pace of the past 18 months, but a slow move higher would be welcome. There are headwinds, such as potentially higher corporate tax rates and narrowing profit margins, but I believe a strong consumer can make up for some of this. Household net worth is at an all-time high, and I think that healthy personal balance sheets can create additional cash that could flow into the economy, either through financial assets, real estate, or personal consumption.
Perhaps we’ll continue to see volatility in the stock market, and while it can be scary, I believe that it is necessary. If there were no risks involved in stock investing, it would look a lot more like bond investing, and returns would likely be lower. So, while volatility can be disconcerting, I think it is what has provided stock markets with good returns, over time.
Now is the time of year to start reviewing your investments for realized gains and losses. If you have taken profits this year, either in stocks or real estate, we might be able to help you offset them. On the other hand, if you took a loss, you might consider taking some gains. My team and I don’t offer tax advice, so please check with your tax preparer for more insights.
In the meantime, please call us with any concerns you may have over the market, your portfolio, or any other financial-related matters.
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.
Holding stocks for the long-term does not insure a profitable outcome. Investing in stocks always involves risk, including the possibility of losing one’s entire investment.
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. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Individuals cannot invest directly in any index. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Scott Mitchell and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.