May 2024
The facts and statistics below describe the financial situation in the United States from January 1st to May 24th.
The S&P 500 is up 11.21 percent year to date.
The S&P 500 P/E ratio currently is at 27, trailing 12 months and has a forward P/E based on issued guidance of 20.5 (the 5-year average forward P/E is 19.2 and the 10-year average is 17.8).
The NASDAQ is up 12.72 percent year to date.
The Dow Jones Industrial Average is up 3.87 percent year to date.
RECENT STATISTICS AND ECONOMIC DATA THAT AFFECT INVESTMENT DECISIONS
The following statistics and data are important factors to consider when making investment decisions:
Overall, 96 percent of the companies in the S&P 500 have reported actual results for Q1 2024 to date. Seventy-eight percent of these companies have reported actual Earnings Per Share (EPS) above estimates, which is above the 5-year average of 77 percent of companies reporting an EPS above estimates, and it is above the 10-year average of 74 percent of companies reporting above-estimated EPS. In aggregate, companies are reporting earnings that are 7.5 percent above estimates, which is below the 5-year average of 8.5 percent but above the 10-year average of 6.7 percent. (John Butters, FactSet)
Eight of the eleven sectors have reported year-over-year earnings growth, led by the Communication Services, Utilities, Information Technology, and Consumer Discretionary sectors. On the other hand, three sectors -- Energy, Health Care, and Materials -- have reported a year-over-year decline in earnings:.(John Butters, FactSet)
The Personal Consumption Expenditures (PCE) price index (an index favored by the Federal Reserve) for March increased 2.7 percent over the same month one year ago. From the preceding month, the PCE price index for March increased 0.3 percent. Prices for services increased 0.4 percent and prices for goods increased 0.1 percent. Food prices decreased less than 0.1 percent and energy prices increased 1.2 percent. Excluding food and energy, the PCE price index increased 0.3 percent.
Real gross domestic product (GDP) increased at an annual rate of 1.6 percent in the first quarter of 2024, according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2023, real GDP increased 3.4 percent.
According to ADP Employment 192,000 jobs were added in April with an annual pay increase of 5 percent. “Hiring was broad-based in April,” said Nela Richardson, Chief Economist of ADP. “Only the information sector – telecommunications, media, and information technology – showed weakness, posting job losses and the smallest pace of pay gains since August 2021.”
Job openings and labor turnover decreased 3.68 percent from February to March and continue the downward trend that peaked in December of 2021. This indicates that the labor market has remained resilient, robust, and is not showing signs of weakness.
The unemployment rate (3.9 percent) and the number of unemployed people (6.5 million) showed little change in April. The unemployment rate has remained in a narrow range of 3.7 percent to 3.9 percent since August 2023.
The labor force participation rate held at 62.7 percent in April, and the employment-population ratio at 60.2 percent showed little change. These measures have shown little change over the year.
The U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI) for All Urban Consumers increased 0.3 percent in April on a seasonally adjusted basis after rising 0.4 percent in March. The all items index increased 3.4 percent over the last 12 months before seasonal adjustment.
The all items less food and energy index (Core CPI) rose 3.6 percent over the last 12 months. The energy index increased 2.6 percent for the 12 months ending April. The food index increased 2.2 percent over the last year.
Advance estimates of U.S. retail and food services sales for April 2024, adjusted for seasonal variation and holiday and trading-day differences -- but not for price changes -- were $705.2 billion, virtually unchanged from the previous month but up 3.0 percent above April 2023. Total sales from February 2024 through April 2024 were up 3.0 percent from the same period a year ago.
The yield curve between the 2-year and 10-year Treasury Bonds currently is -.47; it has been in this range since the beginning of November. The last 6 recessions have happened after the 2-year and 10-year yield curve reversed and turned positive.
The Federal Reserve’s Balance Sheet currently shows $7.299 trillion in assets. The Fed’s Balance sheet was at its highest in April, 2022 at $8.965 trillion in assets. The Federal Reserve has reduced its assets by 18.5 percent
QUESTION FOR CONSIDERATION
The Volatility Index (VIX), often referred to as the "fear gauge," measures market expectations of near-term volatility. The current reading of 11.93 suggests a period of relative calm and confidence among investors, a level not seen since December 2019. With stock indices reaching all-time highs and low volatility, what strategic adjustments should investors consider for their portfolios?
THE BOTTOM LINE
When the stock market reaches all-time highs and valuations seem elevated, many investors feel a mix of excitement and trepidation. The natural question arises: What should you do with your portfolio in such times? It is imperative to remain disciplined, adhere to your investment principles, and make decisions based on your risk tolerance and investment timeline. It is easy to be swayed by the fear of missing out (FOMO) or the anxiety of an impending correction. However, the cornerstone of successful investing lies in adhering to your core principles.
One core principle is to review your investments and ensure that your portfolio is well-diversified across various asset classes. A diversified portfolio should consist of bonds, equities, and commodities. Furthermore, the equities (stocks) in the portfolio should be diversified across various sectors of the economy. This not only helps in spreading risk but also smoothes returns over time. Remember that investing is not about timing the market, but about time in the market. While market highs can be nerve-wracking, it is important to focus on long-term goals rather than short-term fluctuations. Invest in high-quality companies with strong fundamentals, resilient business models, and robust financial health. These companies are more likely to weather market volatility.
Another core principle is to understand your risk tolerance, which is a crucial factor in shaping your investment strategy, especially when markets are high. Assess your ability to withstand market downturns without panicking. If you have a low tolerance for risk, it might be prudent to reallocate a portion of your portfolio to less volatile investments such as bonds or dividend-paying stocks. Conversely, if you have a higher risk tolerance and a longer investment horizon, you might consider maintaining a significant portion of your portfolio in equities, even during periods of high valuations.
Historically, markets have demonstrated a tendency to rise over the long term, despite periodic corrections. One option to consider if you are concerned about investing a large sum of money at market highs is dollar-cost averaging. This strategy involves investing a fixed amount of money at regular intervals, regardless of market fluctuations.
Your investment timeline significantly influences your portfolio strategy. If you are nearing retirement or a financial goal, it may be wise to adopt a more conservative approach by prioritizing capital preservation. Conversely, if you have a long-term horizon, you can afford to ride out market fluctuations and take advantage of compound growth.
Even when the broader market appears expensive, there are often pockets of value to be found. Look for sectors that are undervalued or have lagged behind the broader market. These sectors may offer attractive entry points. Conduct thorough research to identify high-quality companies that are trading below their intrinsic value. Another option is to consider diversifying internationally. Some foreign markets may offer better valuations and growth prospects compared to the domestic market. Explore alternative asset classes such as real estate, commodities, or private equity. These can provide diversification benefits and potential for higher returns. One thing to consider when making international investments is the underlying stability of the country's government and economy and to be aware of any security problems associated with the country.
Market conditions change and so should your portfolio strategy. Regularly review your portfolio to ensure it remains aligned with your risk tolerance, investment timeline, and financial goals. Rebalance as necessary to maintain your desired asset allocation. When the market reaches new highs and valuations seem lofty, staying true to your investment principles is paramount. Focus on diversification, quality investments, and maintaining a long-term perspective. Adjust your portfolio based on your risk tolerance and investment timeline, and seek out pockets of value that can offer attractive returns. By doing so, you can navigate an expensive market with confidence and poise. This will set you up for long-term financial success and that’s the Long and Short of it!
Your feedback is invaluable to me, and I welcome your thoughts and suggestions. If you would like to speak with me about having Odyssey Investments manage your investments, please call 410-917-7587 or email me at Dane@odysseyinvestments.info to discuss your situation and set up an appointment. I look forward to hearing from you!