We have seen a nice rally from the stock market since our summertime lows.
Markets tend to surprise us, and the current rally was a welcome one to all investors. Just when we thought things couldn’t get much worse, the late summer rally began. The news cycle is moving at an alarming rate; every day there is a new crisis, a new hurdle to overcome. An environment with so many moving parts creates uncertainty, and uncertainty creates fear.
The fear is that this market economy is different from markets we’ve seen in the past. This might be true to some extent, but as I like to say: The actors may be different, but the play remains the same.
We may be living in unprecedented times, but that doesn’t mean these are unprecedented markets. Markets do steady themselves and they do grow over time. The difficulty, as always, is determining, ‘When?’
Thankfully, that lingering feeling of uncertainty is beginning to waver in some respects.
For better or worse, COVID is slowly becoming an afterthought in this country. The vaccination rates for the most recent booster are down substantially. More and more people are leaving their masks at home, ready to return to life before the pandemic. This return to a sense of normalcy benefits not only society but the economy as well.
The Economy and The Fed
The economy remains a bright spot in a sea of gloom. The US economy is very robust and is trending in the right direction. Corporate earnings, which may be the clearest indicator of economic health, continue to be positive. Those numbers will be something to keep an eye on as we enter the holiday season, but until corporate earnings subside, there is still some reason to be cautiously optimistic.
However, this is partially driven by inflation, which remains the elephant in the room. The economy is still struggling with the burden of inflation and extremely high energy costs, so economically, we are not out of the woods yet. Thankfully, we have seen inflation numbers ease over the last few months.
This is in part due to the Fed raising interest rates dramatically. The Fed uses interest rates as a tool to stimulate or slow the economy. The easing inflation numbers show that these rising rates have had their desired effect. The Fed recently indicated that interest rate increases are near the end, or at the very least, slowing down. This resulted in a positive market surge at the end of November.
These rising rates have caused a selloff in bonds that is unprecedented. Two years ago, with rates close to zero, bonds, CDs, money market funds, and municipal bonds all paid next to nothing. Now, we are seeing real bargains in the bond market, and it’s nice to see reasonable rates of return on debt instruments.
We use bonds for two things: Income and stability. Short-term bond yields are now decent, but the quandary we are in is determining when to move to longer-maturity bonds in order to lock up these yields for the long-term.
For investors that only focus on growth, it’s a difficult time. For those of us that focus on long-term growth and income, we’re presented with an opportunity to increase overall portfolio income.
The election is also partially to thank for the positive stock market performance over the last few months. Some feel that the election results were a surprise, but regardless of how one feels, the end result was what was predicted. A Republican-controlled House of Representatives, and a split government. The House controls the purse, and the administration controls the pen.
This is not to say that markets specifically prefer Republican policy. What markets love is a split government like we have now: Gridlock. When the government cannot interfere with the economy, things become more predictable, which the markets respond positively to.
Some attribute the market rally specifically to investors bargain hunting. As long-term investors, these selloffs represent opportunities to reposition. Whatever the primary driver is of the market rally, it has been a welcome relief to investors. Unsurprisingly, we believe it is a combination of multiple factors at work.
More than anything, the state of the markets has been a test of our patience and will continue to be moving forward.
Our focus has always been on quality holdings with a strong bias toward dividends. Dividends are generally stable and are not affected by market fluctuations. It is important to remember that even in a volatile market, income generated from portfolios remains fairly consistent. Patience is the key, and it is a lot easier to be patient if you are getting paid while you wait.
With the holidays fast approaching, we at Rich Financial wish you the best during this holiday season.