Since October 22, 2022, the capital markets in general have trended upward.
Year-to-date US Small Caps are up 8.5%, the Nasdaq is up over 11% and even economically challenged international markets are positive 8.5%.
Furthermore, “growth stocks” have temporarily taken over leadership from “value stocks” across all capitalizations (large, mid and small). Should this latest rally lead us to think that we have entered a new phase in this market?
Perhaps.
While encouraged, BaldwinClarke recognizes further challenges remain in 2023. In other words, we may not be out of the woods yet.
Identifying a true market bottom and the transition between bear to bull markets is never easy. These transitions generally come in fits and starts. Last year for example we experienced 7 different bear market rallies – rallies where the market went up (on average) 9% only to trend back lower.
What is apparent now is that there will be no traditional “V” shape recovery this time around.
Part of the most recent rally for example, can be attributed to the aftermath of tax loss harvesting, where investors realized (sold) losses in November & December and are now reentering the markets (post wash-sale rule restrictions).
Additionally, investors have been overly optimistic about a near-term FED pause, or pivot.
The FED did raise the FED Funds rate .25% on February 1st to 4.75% and will likely add another 0.25% in March when they meet again.
Many had felt that deteriorating economic conditions as of late. Combined with inflation trending lower, this could cause the FED to pause and ultimately pivot (becoming more accommodative).
But the FED is steadfast in their hawkish policy intent. Their sole focus is to quell inflation and they will continue to tighten as long as they feel inflation remains a risk. So the biggest risk to the markets continues to center around future FED policy direction and duration.
Recent inflation data for the US shows declines across several components but increases in others. For example, lumber prices have spiked this year, while our mild winter has pushed natural gas prices lower.
However data in Europe has shown inflation increases for Spain, France & Italy, which will complicate the ECB’s policy decisions, which potentially influence future FED decisions as well.
Recessionary fears are real.
Ironically good economic news (consumer confidence, strength, expenditure, strong employment) are bad news for the markets, and can also evoke more punitive FED decisions.
But progress is being made on the inflation front and this lower trend should continue. BaldwinClarke also resides in the camp that if there is a recession, it is likely to be of the milder nature.
An employed consumer is a spending consumer; therefore, we remain cautiously optimistic that later this year the markets can transition more positively and permanently.
Future earnings should normalize as companies “right size” and adjust to today’s realities. We believe that in time we will eventually enter a productive, expansionary phase. For now, remaining vigilant, being well-diversified and having a long-term outlook is important.
Sean Clarke
Managing Director – Investment Advisory
BaldwinClarke
Email: seanc@bcasi.net
