Economic Strength Means Higher for Longer
by Dan Moskowitz, CFP® President & Chief Investment Officer
The stock market and economy continue to show greater strength than predicted. Back in late August of 23, John Lui our CIO wrote “As the US economy, corporate profits and inflation trends improve, the S&P 500 will continue to rise, which will force the sell siders to move to the middle of the boat (neutral) or right side of the boat (bullish) and again revising upward their S&P 500 target prices”. John’s call was very prescient as the market has risen spectacularly since early October and now the sell siders have moved to the middle and right side of the boat. In fact, this morning (April 1 – both Goldman Sachs and HSBC have raised their price targets for the S&P 500 again) (Bloomberg).
This recent rise in market values is making it more difficult to find bargains in both the stock and bond market. They may be harder to find but, there are always opportunities that present themselves. Currently those stocks considered “value” and “dividend payers” look attractive. On the bond side 5-10 year bank bonds offer value along with Treasury bills in a “higher for longer” interest rate environment.
The S&P 500 has returned more than +25% over the past five months. We have already achieved 22 new all-time highs this year. The chart above shows how many consecutive days we have gone without a one-day pullback of at least -2%. This is quite rare (only occurred 5 other times since 1965). No one knows when a pullback is coming, but trying to time these things is futile. If you’re investing for the long haul, time in the market beats market timing almost every time.
This recent rise in market values is making it more difficult to find bargains in both the stock and bond market. They may be harder to find but, there are always opportunities that present themselves. Currently those stocks considered “value” and “dividend payers” look attractive. On the bond side 5-10 year bank bonds offer value along with Treasury bills in a “higher for longer” interest rate environment.
‘Higher for longer’ seems to be a popular phrase on Wall St. these days. As recent as a few months ago the argument was recession or soft-landing. Today strategists have become more optimistic (moved to the right side of the boat) as they now argue over a soft landing or no landing at all. This optimism that the economy is strong enough to not need rate cuts means that interest rates will stay elevated for a longer period of time. As this plays out we are looking for better opportunities to buy longer-dated bonds.
What is the downside of this economic strength? I see two major issues. The first is shorter term. A robust economy will make it more difficult to bring inflation down to the Fed’s 2% target. The other is longer term and in my mind more difficult to fix. Government spending is out of control. While the governments’ reaction to pandemic was the right one, in hindsight, I would say the amount of stimulus given was too much. That stimulus along with an almost $2 trillion dollar infrastructure deal will cost all of us in the long run.
We survived an earthquake and had a major eclipse both in the last five days. At least the Masters golf tournament is this weekend. We hope everyone enjoys a warm spring.
Sincerely,
Dan Moskowitz
Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
