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.
First Major Casualty
This week saw the second largest banking collapse in US history and the first since 2008. Silicon Valley Bank – with a market cap of $18B only 4 weeks ago – collapsed Friday after a furious bank run. SVB’s collapse was far less to do with the Fed raising rates – it was all to do with poor risk management – forced to sell their holding of treasuries at a loss. But this is nothing we have not seen before….
For a full list of posts from 2017…