Tag Archives: Investment Outlook

Patience

In my market outlook a year ago on January 3, 2022, I said, “I think a 20% correction would be reasonable… A 20% correction is not fun, but it is to be expected.” I’m not trying to say I told you so, but we need to maintain perspective after a very ugly year. Bonds went down too.

What now? Coming into 2022, the stock market looked about 7% overvalued. Now, it appears to be about 16% undervalued relative to Morningstar’s fair market value index. Since the end of 2010, only about 5% of the time does the market appear cheaper by this measure.

The broad landscape for investors is much healthier than it was a year ago. Valuations have come down. Interest rates are rewarding creditors for taking risk. Things are getting back to normal, and that’s good.

It might take another few quarters to see results, but the 2022 headwinds should turn into tailwinds later in 2023. The issues include slower economic growth, tightening monetary policy, hot inflation, and rising long-term interest rates. According to most projections, these issues should begin to resolve by the middle of this year.

Geopolitical risks around China, Russia, North Korea, and perhaps Iran, remain a threat to western civilization.

Heightened uncertainty makes the stock market go down and that creates an opportunity for long-term investors.

Investing involves risk, including loss of principal. Past performance is not indicative of future performance.

Halftime 2020, at Last!

As I suggested last quarter, the market has responded positively to a better understanding of Covid-19 and how to treat it. Political polarization, on the other hand, is likely to only increase into the election this fall. Social unrest is a problem, but rioting has given way to more rational discussions of legitimate issues.

 Despite the upheaval, the S&P 500 is only -4.04% YTD, and that is from a level that might be considered 5% overvalued by the Morningstar indicator.

In terms of the Morningstar market valuation indicator, the market ranged from 78% of fair value on April 1, to 5% overvalued on June 8. We finished the quarter 1% undervalued. Recovery has been driven by Government stimulus, business reopening, progress in controlling the virus, and hope for a vaccine. As we open the 3rd quarter, only the Government stimulus remains as a tailwind.

Near term, the market does not seem to have a lot of upside until we have a Covid-19 vaccine. The market anticipates a vaccine by early 2021. Although the market may pop on headline vaccine news, a development that could cause a sustainable rally is likely to me months off. Beyond that, we need to reckon with the 600-pound gorilla at the end of the vaccine tunnel: the election. While most administrations take more credit than they deserve regarding market movements, the current polarization could have a major adverse impact if the Democrats win both the Presidency and the Senate, opening the door to a progressive tax, spending, and anti-business policy in general.

So which direction do I think the market will move next? Last quarter I suggested, “we should see better than average returns in the not-too-distant future.” Now, however, I am less inclined to speculate about the short-term given the range of possibilities and the lack of near-term earnings visibility. Longer-term, the trend is still up. Earnings are almost certain to improve as business and employment normalize post-pandemic. The real question surrounds the rate of growth.