Investing Update: Why Wednesday Was Important
What I'm buying, selling & watching
As we look back on this week it may signal a point where things started to shift.
Wednesday brought an all-time inflation high reading of 9.1%. The highest in 41 years. Signaling a new top to inflation and the further need to hike interest rates.
After the number was released in the morning, my Dad texted me “It’ll be a wild day in the markets.”
It sure was a wild day. But not exactly what people expected.
The market instantly dropped after the inflation release.
The Nasdaq dropped about 2%. As the day went along it started to climb. It actually had turned positive for a good part of the afternoon and finished almost flat on the day.
The high tech growth stocks were actually up quite a bit on the day. The stocks that should have been sold off hard after a higher inflation read and the further increasing of interest rates, actually went up on the day. Does that makes any sense?
On the surface it doesn’t. But we have to look at where things are currently at. This chart shows where the Nasdaq has been every year through June since 1985.
The stocks most affected by increasing interest rates and inflation have been obliterated already this year. That is a lot of what makes up the Nasdaq. Which is why it’s at it lowest level through six months in my lifetime.
This type of reaction to news, is when bottoms are formed. The new is bad, but you have to watch how the markets react to the news. It indicates what the market has already anticipated or has priced in.
Long-term this is a good sign. Would you believe that over the last month the Nasdaq is up 6.7% and the S&P 500 is up 4.7%?
If at the next inflation read we see a tick down I think we will see a big rally. Even if it stays level or creeps up a bit again, the constant talk of inflation being the one and only driver to sentiment and the overall market may show it’s all be priced in.
I mean can it get that much worse? When a lower inflation read comes in, or another positive catalyst comes up, which seems like it has been forever since we’ve had any positive macro news to move the market, I expect a big rally. And that is how I’m currently positioned with my long-term outlook of being fully invested.
S&P 500 Forecasts for Year-End
As of Friday the S&P 500 sits at 3,863. That’s -19.4% for the year.
Below is what Wall St banks have forecast for the S&P 500 year-end 2022. What is surprising here is not a single one is forecasting a down second half. In fact, if you want to point to something that is much more bullish than I would expect, it’s these forecast by the major banks. Some of these targets paint the picture that they see a rip higher to the upside in the second half of the year.
The Stock Market is Volatile Short-Term
Everyone who invests in the stock market is aware of the volatility and ups and downs that you experience. We feel great when things are green and going up. We get anxiety and worried when things are red and keep going lower.
This chart illustrates the return each year of the S&P 500 going back to 1980. That is the grey bar. Then underneath that, the red dots shows the farthest drop the S&P 500 experienced that year.
It shows just how volatile the stock market is during short-term periods. The average intra-year drop is 14%. But the annual returns finished positive 32 of 42 years. If you wanted to see a chart about volatility and how long-term investing reigns supreme this is the chart. One of my favorites.
Returns by Asset Class
It’s always interesting to look back at what asset classes returned each year. This shows the benefits of diversification and why performance chasing hurts.
This colorful chart goes back 14 years. The classes with the biggest returns also have seen some of the biggest drops. The possibility for higher returns brings higher risk. The risk reward proposition in investing is clearly illustrated below in this chart.
Here are the returns by asset class over the last 20 years. I was surprised to see REITs leading the way. Bonds and homes are almost identical. The loser over this term has been the average investor. Trading in and out of positions while buying and selling stocks at the wrong times really hinders their returns.
This quote from a piece by IFA.com explains the low returns for the average investor very simply.
Often succumbing to short-term strategies such as market timing or performance chasing, many investors show a lack of knowledge and/or ability to exercise the necessary discipline to capture the benefits markets can provide over longer time horizons. In short, they too frequently wind up reacting to market maturations and lowering their longer-term returns.
What I’m Watching
Now the earnings begin. To help take the focus off all the macro news, now the individual companies will start to report earnings.
Whether companies meet or fall short of earnings will play a big roll, but what will be most important is what are their forecast. What are they forecasting for the future quarter? Will they be raising or slashing guidance? If they slash, how big of a cut will they make?
All this will give the insight into what shape the consumer is in and a feel into how the overall economy is doing. The earnings call is when you get answers on the current business and economic landscape from the leaders of companies. They know what is going on before anyone and this is when information starts to come out.
3 Stocks On My Radar
Lululemon (LULU 0.00%↑)
Target (TGT 0.00%↑)
Cleveland-Cliffs (CLF 0.00%↑)
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Disclaimer: This is not investment advice. You should not treat any opinion expressed as a specific inducement to make a particular purchase, investment or follow a particular strategy, but only as an expression of an opinion. Do your own research.