July 24 this year the S&P 500 traded around 4600. At the time, gains were almost 20% for the year. The bulls had all the momentum and analysts were ratcheting up their end of year forecasts. Some felt 20% YTD gains were not enough – calling for even greater upside. What happened? Stocks corrected around 10% offering investors a better opportunity. The game of near-term forecasting is a fool’s errand…
Stocks Are Not Cheap
The S&P 500 has had a fantastic first 6 months of the year – up almost 15%. That’s a welcomed relief from the miserable 2022. But are stocks now too expensive? What’s the premium investors are being asked to pay? There are a couple of ways we can assess this. For example, we can compare the earnings yield against the risk free rate of return (currently around 5.5% and going up). And whilst it’s always good to maintain some (long) exposure to the market – we need think carefully about how much (and where)
Why Is it Different This Time?
Whenever history looks like repeating – it’s worth asking what’s different this time? I say that because the past is never a guarantee of what’s ahead. Put another way, if you are making decisions on that basis, you might be suffering from “confirmation bias”. And that can be a blind spot. My (possible) blind spot is I think a recession is more than likely within the next 12 months. As such, I am only willing to put about 65% of my portfolio in risk assets. If I felt a recession was not likely – I would meaningfully increase my exposure. My bias is to lean into historical data (and leading indicators) which have reliably predicted recessions in the past. That feels logical. But I could be wrong.
Fed Likely to Pause (for now)
With the debt ceiling deal behind us – markets will now focus on the next FOMC meeting. It’s widely expected the Fed will pause on any rate hikes in June – especially given some of the underlying weakness in the jobs data. However, the market is not ruling out further increases later this year. I also take a look at AI boom in the market… call it “BoomGPT”. Invest with optimism but do it with your eyes open.
For a full list of posts from 2017…