Dow Jones Industrial 35,228.48+2.08%, S&P 500 4,536.34+0.69%
Nasdaq Composite 14,032.81-0.57%, US Ten Year 3.847%, Crude Oil $75.60
Stocks have had a particularly good year so far, a welcome turn of events after last year’s disappointing return. We all know that it was the Federal Reserve’s aggressive hiking of interest rates in early 2022 to calm inflation that caused the sell-off a year and a half ago. Continuing into 2023, the total of ten rate hikes increased rates from below .25% to 5% to 5.25%. And notwithstanding a pause in raising rates in the June meeting, the central bank has made it clear that two more rate hikes are likely in the July and September meetings.
What caused equities to recover in the fourth quarter of 2022, despite the certainty of even higher rates? Markets are forward-looking, and the recovery is based on the expectation of a cessation of rate hikes followed by rate reductions. Note from the price chart above the sudden acceleration of stock prices at the end of May as indicated by the blue triangle, when the Fed indicated it would forego a rate increase in June, which it did. From the chart below we see that investors expect further rate cuts.
You may have also heard of how the recent rally had extremely low breadth, where a tiny handful of “mega-cap” stocks led the S&P 500 higher while most stocks in the index were flat. But this does not bode ill for the general market. From 1991 through 2023 year-to-date there have been twenty-four “up” years for stocks, and seven “down” years. In every one of those up years where the ten largest stocks in the index went up, so did the entire index.
While it may seem tempting to “take some money off the table” by selling or reducing one’s stock market winners, it behooves investors to maintain a healthy exposure to stocks. There is a persuasive case for further stock market gains through the back half of the year. Maintain at least a market weight in information technology and internet-based communication services growth stocks which tend to do very well when interest rates fall. It may be timely to extend maturities in bonds. Since the Fed started raising rates 16 months ago investors have been piling into very short-term fixed income securities such as six-month US Treasury notes and bills. Understandable, when receiving 5% or more with virtually no risk. But that is temporary, and now might be the time to extend maturities several years to lock in higher rates for a longer period.
Have a Profitable Week,