Rhyme Time

A little relief with a couple of good days this week (well at the time of writing at least). 3,666 was the low we put in on the S&P 500 last week, and we quickly picked up a quick 100 points or around 3% in a few days. That comes on the heels of the carnage from the inflation number the week earlier.   

These moves are a very typical move in bear markets (bear market rallies). They can move 10+% very quickly and very often. At these stages there is generally nothing logical about these moves. Nothing from a fundamental standpoint that you could put your finger on to say that makes sense. It’s not supposed to.

Remember typically the stock market’s job is to be the ultimate pre-pricer of all commonly known things. It’s trying to put a futuristic price on all the information we have floating around today. I tell you all the time that it all comes back to earnings in the long run. The move in the market now is likely assuming (and already priced in) that earnings will come down due to higher loan costs coming from higher rates, and a consumer who will no longer spend the amount we once were. In other words, creating a possible negative GDP growth for two consecutive quarters…which is called a recession.

The word “recession” sends a fear throughout the investing world, mainly thanks to the 24-hour media we have today. It’s a natural part of a market cycle. Things go up, sometimes quicker than they should, so therefore they need to come back to earth. To me the point is mute, and here’s why:

We are investing for the long term, meaning at least your life expectancy or that of your heirs. On average we see recessions every 7 years, and when we get one, it generally provides the best opportunity to invest. The overall market is made up of individual companies. Their job is to create profit for their owners, (that’s you, the shareholders). When things slow down in a business, they will take measures to protect their profits by reducing costs. When they do this and the macro economy turns around, then that’s generally the time that their stock price returns the best results.

Stocks bottom before the economy does. That’s the takeaway I want you to have from all of this. If earnings come down for companies, the stock prices likely are much higher by the time earnings have actually troughed. Again, I’ll take you back to the market being a pre-pricer. It’s trying to predict earnings 3-24 months in advance. It’s an impossible task, but this (free markets) is the most efficient way to do it.

I will now include my all-time favorite chart. Any one year your divergence is huge, but over the 20-year period the results become predictable. We are investing long term.  

Any opinions are those of Mick Graham and not necessarily those of Raymond James.  Expressions of opinion are as of this date and are subject to change without notice.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Investing involves risk and you may incur a profit or loss regardless of strategy selected. Individual investor’s results will vary. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Charts are for illustration purposes only and not intended to reflect the actual performance of any particular security. Prior to making an investment decision, please consult with your financial advisor about your individual situation.