Trending Topics
This Month’s Trending Topics
Markets
In the face of deteriorating economic data and continued stress in the banking system, equity markets continue to grind higher. What has been a little concerning with the market rally this year has been the contribution of returns by only a few individual stocks. In the first quarter, five stocks (Apple, Microsoft, NVIDIA, Telsa and Meta) accounted for 2/3 of the returns for the S&P 500. Apple and Microsoft now make up 13% of the S&P 500, which is more than any other individual sector combined outside of healthcare.
Inflation
Inflation has dropped down to 5%, but still remains much higher than the sub 3% rates we became use to prior to COVID. Five percent may seem low when compared to last year, but 5% inflation means that your money will lose 50% of its purchasing power in just 14 years. At 3% inflation, it would take 24 years to lose 50% purchasing power. On the positive side, inflation other than housing and rent has been coming down much faster. In the case that you own a home or don’t pay rent, your inflation rate has probably come back down to around 3% or so.
In order to combat inflation, the Federal Reserve has continued to raise rates and has indicated keeping rates higher for an extended period of time. This has led bank depositors to move money out of banks looking for higher rates. The banks lose deposits, raise loan requirements, cut credit lines, thus making capital scarcer. This should, in theory, reduce the demand that has been driving inflation higher.
The problem they are running into is the economy is less credit dependent now than in the past. There is also a labor shortage, which has kept wages higher and layoffs to a minimum. Getting from 9% inflation to 5% hasn’t taken long, but getting it back under 3% and keeping it there may prove more difficult.
Moving forward
While markets grind higher and headlines become more optimistic, we wouldn’t be surprised if markets get more volatile and pullback this summer. US equity markets remain expensive versus historic levels, inflation is still above the Federal Reserve’s 2% target, Frist Republic Bank was just bought out by JPMorgan as it was on the brink of becoming the third major bank failure this year, and a market being driven by only a handful of stocks isn’t healthy and sustainable. We also don’t think this is the time to abandon stocks as investor sentiment is near all time lows and markets have historically done well when everyone is negative.
Investing $1,000 in 1997 into the Russell 3000 Index, which tracks the 3,000 largest US publicly traded companies, resulted in growth to $10,367. Missing just the week ending November 28, 2008 reduced $10,367 to $8,652. Missing the 6 months ending September 2, 2009 reduce total returns by over 1/3. We still believe in staying invested and diversified. Markets may pullback, but no one really knows when or by how much.
Also, try to not focus on the past value of your portfolio when markets were at all time highs but look at your results over the past 10 years or even longer. If you focus on that high-water mark, you will always be chasing a number and may end up losing the more meaningful long-term perspective which is far more important.
If you are still holding cash at a bank paying little or no interest, look elsewhere. There are short term CDs and T-bills paying near 5% and online savings accounts close to 4 percent.
Be sure to keep us up to date of any upcoming cash needs that we are unaware of so we can ensure these funds are not in equities.
Please let us know if there are any “trending topics” you are interested in and would like us to include in future writings. We want to be sure we are providing information and addressing topics that are important to you.
This material is meant for general illustration and/or informational purposes only. Views expressed in this newsletter may not reflect the views of Royal Alliance Associates, Inc. It is our goal to help investors by identifying changing market conditions. However, investors should be aware that no financial advisor can accurately predict all of the changes that may occur in the market. This material should not be relied upon as investment advice. Investors should note that there are risks inherent in all investments, such as fluctuations in investment principal. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. This article contains forward looking statements and projections. Past performance is no guarantee of future results. Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice. If you don’t wish to receive marketing emails from this sender, please reply to this email with the word REMOVE in the subject line.