Last October, investors were selling at the lows and piling into US Treasury bills. While they were earning 5% safely on their money, the stock market quietly surprised everyone by rising more than +25% over that same period.
The naysayers spent the first six months of 2023 coming up with excuses. In January, they said the economy was about to fall into recession. In February, inflation was not going to decline fast enough. In March, the banking system was going to collapse. In April, the Fed was going to tighten too much. In May, the rally was too narrow.
Why did the stock market keep rising? The economy has outperformed. We have had fourteen consecutive months of stronger than projected jobs numbers, inflation has continued to moderate, corporate earnings beat expectations and home values have remained stubbornly high. For more details, please revisit John Lui’s (CWM’s Chief investment Strategist) market thoughts from last month.https://www.chathamwealth.com/blog/the-stock-market-looks-forward-and-it-sees-green
Where are we headed? There are always potential problems on the horizon. Currently, we are keeping our eyes out for issues concerning regional banks, commercial real estate, and consumer spending as we head into the fall.
Reason for optimism – On the one hand the Fed has raised rates substantially to reduce inflation. On the other hand, law makers are spending a massive amount of money that will stimulate the economy. To call it the “Inflation Reduction Act” is laughable. The IRA along with Chips and Science Act, and The Bipartisan Infrastructure Law (BIL) are due to add $2 trillion dollars (McKinsey) in spending over ten years. We are starting to see shovels in the ground and this spending will help corporations and individuals alike. Based on this stimulus, we do not see a real slowdown in jobs or spending.
We would be very surprised if the Fed did anything with rates over the coming months. It seems to me that FOMC now stands for The Federal Open Mouth Committee. Chairman Powell and other members have done a good job of constantly talking about raising rates. This talk has caused rates to drift higher. If rates stay high, the Fed doesn’t have to do anything.
Having a diversified portfolio constructed of high-quality investments has served our clients well for a long time.
Enjoy your summer!