Stock Market: Insights and Outlook
By the end of July this year, the US Stock markets – as measured by the S&P 500 and the Nasdaq Composite Index – were up over 20% and 35%, respectively. These are way above average returns, but are a welcome relief from 2022, when the same indices were down almost the exact same amounts as they are up this year. However, this doesn’t tell the whole story, because only a handful of stocks have dominated these broad indices.
If you removed just a few names from the average – like Apple, Microsoft, Alphabet, Amazon, and nVidia – the S&P 500 index would be up only a few percentage points. This is what is referred to as a narrow market – a few big names are disproportionately skewing the averages. There has been broader participation in the last couple of weeks. Specifically, the small and mid-cap categories have been participating in market gains alongside the mega-cap leaders of the year’s first half. This is a welcome and positive thing for the overall health and direction of the equity markets!
Some contributing factors to the positive deflation include decreasing inflation and strong job growth so far this year. In June of 2022, the US inflation rate peaked at 9.1%, which has driven the Federal Reserve to increase interest rates eleven times to get inflation closer to their target of 2%. In early August, inflation was in the 3.3% range— still higher than the Fed’s target, but much lower than last year’s high.
For stock investors, the big question remains: How much more will the Fed raise rates? Many observers now think the Fed may have only one more rate hike, and
some think the most recent hike was the final one. Either way, we are close to the end of the hiking cycle, which – for equity investors – is welcome news. If the Fed raises rates much more, the concern is that higher borrowing rates will increase business costs, leading to revenue reduction and ultimately job losses, which could lead the US into a recession.
Further, this can impact mortgage, credit card interest rates, and other loans, making consumer borrowing more expensive. These higher costs help cool off the economy, thus helping to reduce inflation. The Federal Reserve is hoping for what many call a “soft landing,” which is when inflation cools off and there is a moderate economic slowdown after a period of significant growth. It’s your classic “Goldilocks Event,” when the economy is not too hot or cool— it’s just right. Unfortunately, the Fed’s track record for getting things just right is less than stellar, which is another reason to worry.
The good news in a higher interest rate environment is that savings rates, like Certificates of Deposits and money market mutual funds, have significantly increased interest rate yields. That’s good news for savers looking to earn more interest on their short-term savings, and cash they set aside for near-term expenses.
Looking forward, a slight pullback in the US stock markets wouldn’t be a surprise. However, any pullback may be short-lived, and by Spring of next year, we predict stock prices climbing from where they currently are. We see technology continuing its upward momentum, along with industrial and precious metal stocks being areas of strength.
As with all investing, there are risks at every turn, and data changes daily. What’s good news for some is bad news for others. Managing your money is a lot like your health and your relationships— the more work you put into them, the better the outcomes. There aren’t many things in life that you can ignore and expect to work out in the end, and your money and financial plan are no different.