Will fewer rate cuts dampen the enthusiasm for stocks? It certainly hasn’t to this point. And could higher bond yields impact stock valuations? So far the market is not bothered. These (and other) questions need to be weighed carefully with the S&P 500 trading ~21.5x forward earnings. And whilst the multiple is heavily skewed by the ‘Mag 7’ – 21.5x is far from cheap. What’s more, from a historical perspective, paying a multiple above 20x offers investors a very low risk premium (e.g., with the risk free rate above 4.0%). But wait… what’s to say stocks cannot rise further? We’ll explore why they can…
"S&P500"
Fed’s Task in Changing Times
How aggressive can the Fed be in the coming months? The economic data doesn’t suggest a material slowdown – surprising to the upside in most cases. Therefore, are markets pricing in too many rate cuts? Maybe… longer-term yields are rallying post rate cuts. What’s this mean?
Defensive Sponges Soaking Up Liquidity
After enduring its worst week since March 2023, the S&P 500 rebounded with its best performance of the year. From mine, this kind of week-to-week unpredictability highlights the futility of attempting to predict short-term gyrations. It’s not something I pretend to be able to do. My approach prioritizes a longer-term perspective – as it increases the odds of success. It’s near impossible to attempt to trade around Mr. Market – you can never know what his mood will be from one day to the next. Therefore I choose to maintain a cautiously invested strategy – where ~65% of my capital remains in high quality stocks.
Thoughts on the Rest of the Year
Over the past year or so – one of the key investment themes has been “bad news is good news”. Bad news implied the Fed was more likely to cut rates. For example, after the market incorrectly assumed we would see 6 or 7 rate cuts at the start of the year – the Fed have finally come to the table. In other words, the economic risks (to growth) are sufficient enough for the Fed to act. This is important. What happens during this transition is “bad news is no longer good news”. History shows us when economic conditions worsen during an easing cycle – stocks perform poorly. Therefore, the market’s primary concern now is whether the Fed has waited too long?
For a full list of posts from 2017…