Weekly Market Update February 3, 2023
Dow Jones Industrial 33,926.01 -0.15%, S&P 500 4,136.48 +1.62%,
Nasdaq Composite 12,009.95 +3.31%, US Ten Year 3.524%, West Texas Intermediate $73.23
Investors cannot be sure that the stock market’s mid-week rally has legs. It was borne out of expectations that the Federal Reserve is close to ending its interest rate increases. The increase announced this week was only 25 basis points, compared to the 75 and 50 basis points increases of the past year that the Fed has given us in its commitment to lower inflation. So on Thursday investors sold all the “safe” consumer staples and healthcare stocks that had served them so well over the past year, and redeployed the funds into the technology and communications services stocks that were crushed in 2022. All due to Chairman Powell stating that he sees “disinflation,” meaning nothing more than very high inflation declining to merely high inflation. But then today the January jobs numbers came out showing very strong employment, belying the headlines of tech sector layoffs, and the market retreated in fear of reenergized Fed hawkishness. It illustrates how interest rates and forward rate expectations trump company fundamentals like sales or earnings or yield. And it supports the widely held belief that in the short-term, stock prices are not reflective of the economy.
The chart below shows how the economy and stock prices are not in sync. That is because the economy is back-ward looking, and the stock market is forward looking. Stocks discount future earnings.
From the relationship above one can see how “taking some money off the table” during a surging stock market is often a good idea; no one ever got broke taking a profit. Similarly, buying stocks when the investing world is fearful during a struggling economy is frequently an opportune time to establish positions in good companies at bargain prices.
What stock prices will do over the longer term is reflect corporate earnings. Even during bad economic times some industries and companies will be profitable.
The lesson here is to always stay invested, focusing on stocks of firms with talented management and strong financial fundamentals, in good businesses. You cannot win if you are not in the game.
Have a Great Weekend,