Market Year to Date: Volatility to Nowhere

Hello everyone, my name is Brett Meiring and I’m our investment strategist here at Katterhenry Investment Group. I am here today to provide our thoughts about the market year to date, moving forward.

The theme of today’s video is volatility to nowhere. We believe that throughout the year, we will see a lot of price movement to the upside and to the down, but end the year around current levels.

When it comes to the economy, inflation continues to rule the day. We agree with Wells Fargo Investment Institute in that inflation will continue to move lower albeit at a choppy pace, as the Federal Interest Rate hikes continue to work their way into the economy.

We are a bit discouraged and keep a watchful eye on leading economic indicators. As you can see in the Wells Fargo Investment Institute slide, it’s at a level that often forecasts a pending recession.

Some good news, though – the U.S. Labor market continues to remain very tight. The unemployment rate is low, and there are many more job openings currently in the country than there are unemployed. Given that imbalance, it’s hard to be overly pessimistic.

Now, how does that tie into the stock market? As mentioned earlier, we think investors will ride the rollercoaster of returns this year. Stock returns boil down to 2 things – how much companies project to make and how much investors are willing to pay for those earnings. We agree with Wells Fargo Investment Institute that earnings estimates will continue to move lower due to declining margins and weakening demand. However, earning estimates have come down a lot the past year, so we think further downside is limited.

It is important not to overreact to negative market movements. As you can see in the chart, historically stocks start moving higher well before recessions are over. That means that markets start pricing in the better times ahead even while negative news about the economy is being reported. Lastly, this chart is a great reminder that stocks have remained resilient during FAR WORSE times than we have experienced recently.

When in doubt, zoom out!

We will end today’s call with some optimism, as we feel good times are ahead for bonds. Bond returns are closely correlated to their starting yield. As you can see, yields have risen to levels not seen in quite some time. In fact, Wells Fargo Investment Institute slide demonstrates yields are higher across the board relative to long-term inflation expectations. If we are right, that inflation will continue to move lower and recession risk remain. We are optimistic about the return investors can receive in this less-discussed part of the market.

Thank you for your time today, and we hope you found this video informative. If you have any specific questions, feel free to reach out to your advisor as they will be happy to address them. Thanks and have a great day!