Most experts in the forecasting of stock prices, as in, highly paid ‘strategists,’ ‘economists,’ and ‘investment officers’ of large, multi-national financial institutions started 2023 expecting stock markets to decline or remain stagnant. Many of these experts doubled down on their gloomy predictions as the market defied expectations out of the gate. As I write this newsletter on the last day of the second quarter, the stock market has once again zigged when everyone thought ‘zag’. Expectations have been shattered again – surprise!
What gives? Why would the market dare defy the forecasting abilities of our venerated investment banks and economists, all of whom also would prefer that the market goes up? It’s never entirely clear what drives stock market action, but, in the past low interest rates were at least partially responsible. Stock prices reflected risk premiums accounting for additional leverage that a private equity owner could achieve in a buyout. Hedge funds had the luxury of ‘positive carry.’ This is the enviable position of buying assets (stocks, bonds, others) with high expected returns by borrowing money at rates lower than those expected returns. These trades can even work with relatively safe assets like bonds. However, interest rates are much higher than a year ago, so this may not be the tree to bark up.
Perhaps the economic data coming from various reporting sources – employment and inflation - are looking better than expected, and this is what is driving the market higher. Many months after the Fed raised interest rates, the U.S. economy has maintained a strong footing and inflation has come down substantially. A burning question is whether these numbers will be sustained or if a ‘hard landing’ is in store for the economy and the markets. One thing is certain – stock prices will move around.
Avid readers of this newsletter know that we often recommend rolling with the punches when stock markets decline and staying invested for the long run. Long-term planning considerations go into the decision to own stocks as an allocation because, historically, stocks have provided the best returns (long-term) and an inflation hedge. Even retirees should have exposure to stocks – just a more moderate amount. The good news too, is that conservative options like bonds are looking increasingly attractive as potential returns are compelling for the first time in years. Lionshead remains focused on delivering results that fit within your specific investment parameters. Every client has a different plan, a different outlook, a different ‘spend,’ and a different amount of money. Our purpose is to consider all that is part of your unique equation and ensure your plans remain on track.
Another purpose of ours is to help you better grasp the whole equation of your financial life. People often have anxiety over finances when they don’t need to. Changes like higher interest rates may appear detrimental to your financial well-being, but they may even be counterintuitively helpful. Other examples abound, too. If you want to be sure that you’re heading where you want to be financially, please reach out to review your situation with us. In the meantime, we wish you an enjoyable summer!
Scott Lasky, CFP™
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All statements are opinions and should not be construed as facts. This newsletter is for informational purposes only and should not be deemed as a solicitation to invest, or increase investments in Lionshead Wealth Management products or affiliated products. Information provided is for educational purposes. Your advisor does not provide tax, legal, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions. Further, your advisor makes no warranties with regard to such information or a result obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.S&P 500® Index: is an unmanaged index of 500 common stocks primarily traded on the New York Stock Exchange, weighted by market capitalization. Index performance includes the reinvestment of dividends and capital gains.