As the title would suggest, the stock market rally coming off the June 16th lows has reversed course and we are now close to retesting the June bottom. With that in mind, where do things go from here?
Jerome Powell and the Federal Reserve committee met this week and raised the Fed Funds Rate (overnight interest lending rate) by 75 basis points (three quarters of one percent). This was completely expected by the market, and many would argue had already been priced in. What was not expected was the more hawkish tone of Powell looking into a longer-term tightening stance going into next year. When market participants heard that hiking interest rates into 2023 was on the table, the stock market got spooked and for good reason. In an effort to tamp down inflation by making the cost of borrowing more expensive and therefore slowing the economy, there are worries that the Fed might be overcorrecting which could send us into a full-fledged recession as opposed to the proverbial “soft landing”. We do expect inflation to subside in the coming months, which is positive for financial markets. Only time will tell, but what I would say is that I have rarely seen a battle of the bulls and bears as fierce as we have now. Remember, we stress tested your plan and portfolio with the Recession Prep Scorecard® in 2019. Let us know if you would like to revisit that exercise. Please see post-recession market returns from the past here.
I always say be careful who you listen to as it can have dramatic effect on your investment outcome. For example, Ron Baron a very seasoned and successful equity manager believes the stock market is a “once-in-a-generation buying opportunity”. Ray Dalio, founder of the world’s largest hedge fund, recently said the stock market could go down another 20%. Either investor could be right or wrong in the short term, nobody really knows. I do follow my favorite and most successful investor of all time, Warren Buffett. His famous line is “be fearful when others are greedy, and greedy when others are fearful”. Mr. Buffett does not predict the short-term movements of the stock market but buys solid businesses either private or public at reasonable prices. He’s a buyer in our current market environment.
The housing market is rolling over as well. Low rates, low supply and stay at home mandates during Covid pushed residential housing prices higher at a furious pace. Mortgage rates have increased from the beginning of the year from 3% to over 6%, essentially doubling the cost of monthly mortgage payments making housing less affordable for those who borrow. The Fed is intentionally wanting all risk markets to cool off to a more sustainable price environment for both stocks and real estate. We are advising and have advised that if you are a seller of real estate, there is no time like the present as rates will continue to increase and if you are a buyer, you have more negotiating ability than the past few years.
We do have about 2% left in the “dry powder” holdings for our clients who have added cash or agreed to sell from stocks to set money aside back in early March. You will likely see us do some buying as we retest market lows. I am on the more bullish side even knowing we do face economic headwinds. Prices and valuations are certainly more attractive as compared to 9 months ago. It’s important to remind ourselves that the stock market is down 30% of the time and we have a strategy for down markets. Please refer to the June 15 client note (here) for the moves we have made and our down-market strategies. Now is a good time to add to your account and be opportunistic as valuations retreat knowing better times will come.
The stock market is a forward-looking indicator and much of the bad news now and looking forward could already be priced in. Now with higher rates, we can finally get some decent yield out of bonds, which is something we have not seen for years. Know we are working on protecting our client accounts every day, especially during times like this year. It is also important to note that we have seen Retirement Shock Absorbers grow these past few years because of the tailwinds of strong performance in client accounts even considering this year's poor market.
Thank you again for the confidence you place in me and the Brown and Co team. We have had very positive client meetings and conversations during this tough time, as we are able to provide you context and we look forward to meeting you soon if we have not already done so. Lastly, we often find difficult markets are a time when we see new clients. Please let us know if someone you know might be looking for our guidance. Thank you.
Best,