June 2023
WHAT YOU NEED TO KNOW
The following facts and statistics describe the situation from May 1 to June 15, 2023
· The S&P 500 increased by 5 percent and is up 14 percent year to date.
· The S&P 500 P/E ratio currently is at 24 (the historical average is 16).
· The NASDAQ increased by 12 percent and is up 31 percent year to date.
à The NASDAQ is composed of higher beta, growth stocks.
· Many of these stocks currently are trading at a premium to major indices.
· The Dow Jones Industrial Average was flat from May to present and is up 3 percent for the year
RECENT STATISTICS AND ECONOMIC DATA THAT AFFECT INVESTMENT DECISIONS
The following statistics and data are important factors to consider when making investment decisions:
· PCE (a favored index by the Federal Reserve) is 4.4%, an increase of .2 percentage points from March’s 4.2%.
· According to ADP Employment 278,000 jobs were added in May with an annual pay increase of 6.5 percent.
· Job openings increased by 3 percent from 9.7 million in April to 10.1 million in May. There is an increased demand for employees; employers in all industries are having a difficult time filling all positions.
· The U.S. unemployment rate is 3.7%, an increase of .3 percentage points from April’s 3.4%.
· The Consumer Price Index (CPI) is 4% (for the previous 12 months before seasonal adjustment); this is down .9 percentage points from April’s 4.9%.
· Core CPI (excluding Food and Energy) is up 5.3% from the previous 12 months .
· Month-over-month retail sales increased by .3 percentage points when compared to April
· The yield curve between the 2-year/10-year Treasury Bonds currently is -.91, a level not seen since 1981 (which preceded the recession of July 1981 to November 1982).
· The Federal Reserve’s Balance Sheet currently shows $8.353 trillion in assets. It was June 2022, one year ago, that the Fed began its quantitative tightening. According to the minutes from June 2022, the Fed was going to start reducing the balance sheet by 47.5 billion in June, July, and August. Then starting in September the reductions would be 90 billion per month, which means that currently the balance sheet should have been reduced by 952.5 billion. They missed their QT goal by 526 billion.
QUESTION TO CONSIDER
Are we in the beginning of a new bull market and do the bulls now have a chance to run, or is it time for the bears to come out of hibernation and take the reins back given the uncertainty of the economy?
n May, when the Federal Reserve decided to raise rates, the market took it as a “dovish hike”. Their recent decision to pause is being referred to as a “hawkish pause”, because of FOMC’s rate projections and the need to raise rates in the future.
THE BOTTOM LINE
Why do markets put so much emphasis on the Federal Reserve? Because the Fed has the power to control supply and demand with their ability to control the cost of capital with the fed funds rate, currently 5.08 percent. With inflation decreasing -- but still 2 percent above the Fed’s target rate of 2 percent -- the market is reacting like all is clear with the Nasdaq 35 percent above recent lows. Financial markets are forward-looking mechanisms that try to anticipate future economic conditions, company performance, and policy changes. Investors rely on various indicators and sources of information to make predictions about the future direction of asset prices, interest rates, and overall market conditions.
In the context of the Federal Reserve, markets pay close attention to the central bank's actions and statements because they provide insights into future monetary policy decisions. By analyzing the Federal Reserve's statements, economic data, and other relevant factors, market participants try to gauge the future direction of interest rates, inflation, and economic growth. This information is then incorporated into asset valuations and investment strategies.
Truth is, there always is a degree of risk associated with the economy and the stock market. Economic conditions can be influenced by a variety of factors such as global events, policy changes, natural disasters, technological advancements such as artificial intelligence, and shifts in consumer behavior. These factors can have unpredictable effects on the economy and financial markets that lead to potential volatility and risks for investors.
Investing in fundamentally strong companies that have ample free cash flow and demand for their goods or services at a fair value is how I approach investing. Such companies often are better positioned to weather economic downturns and market fluctuations. They tend to have solid financial foundations, sustainable business models, and the ability to generate profits even in challenging times.
By investing in companies with strong fundamentals, investors aim to reduce the risk of investing in companies that may face financial difficulties or struggle during the next economic downturn -- which eventually will happen. It has proven true that companies with a competitive advantage, a strong market position, and a solid customer base are more likely to maintain their profitability and provide consistent returns to shareholders over the long term.
However, it is important to note that even well-managed and financially sound companies are not immune to broader market movements or unexpected events. Market downturns can effect the stock prices of even the most robust companies. Therefore, diversification across different industries, asset classes, and geographic areas can further help manage risk and reduce exposure to individual company-specific risks.
Furthermore, investors should consider their own risk tolerance, investment goals, and time horizon when making investment decisions. Investing in equities carries inherent risks, and it is crucial to align investment strategies with individual financial circumstances and objectives.
In conclusion, investing in fundamentally strong companies with ample free cash flow and demand for their goods or services at a fair value is always a sensible approach to mitigate risks associated with the economy and the stock market -- and that is the long and short of it!