Not yet, but it will come
“Buy not on optimism, but on arithmetic.”
– Benjamin Graham
Historical Market Summary
Last week was a big week for acquiring more information as to where we are in this market cycle. The Consumer Price Index reported that inflation rose in April 8.3% over the last 12 months. The good news was that the rate at which prices are increasing reduced from 8.5% in March, however the rate at which price increases are occurring was higher than what was expected by a consensus of economists. Que Wah Wah Wah sound effect. This data is telling the Federal Reserve they are still behind the inflation curve, so we should expect full speed ahead with interest rate increases.
Thursday and Friday provided weary investors with a welcomed break as stocks rose. A client of mine said that his friend’s advisor thought we were close to a bottom because of how long the stock market has been on a downward trajectory since January. No disrespect to his friend’s advisor, but it has been my experience the stock market pays little attention to time. Markets can remain overbought or oversold for an extended period of time. We are entering only the 5th month of this down cycle. One only needs to look at the stock market history from 1991 to 2000 or 2009 to 2020 to see decade long cycles are possible. Thankfully history is on our side and growth cycles have been much longer in duration that down cycles, and I presently do not believe we are in the midst of a multi-year down cycle, but to understand where we are we must first understand the environment, not the calendar.
A quick Google search of the S&P 500 index (large cap stocks) allows you to view a chart of that index over different time spans. Pay attention to how steep the rise in stocks were from 2020 to 2022. Why? Stocks, more correctly, publicly traded companies love cheap money. During that period of time interest rates were at historic lows and U.S. companies took advantage of almost free money to expand operations and revenue. Those days are over, for the time being, and investors are coming to grips with the fact that debt now comes with interest that must be paid. This interest can cut into profit margins and expose companies that were carrying too much debt. So why the recent rise in stock prices on Thursday and Friday?
If you remember, the stock market had a nice run from March 14 to April, then it gave away those gains as the Federal Reserve increased rates by 0.50% in April, which was the largest interest rate increase in over 20 years. The stock market overshoots everything it does. It will overshoot both booms and busts, which is why market prices rebound and subside so quickly. I would agree the stock market was too oversold (too negative) mid-week last week for the moment, but I do not expect us to be at the end of the current down cycle. I wouldn’t be shocked if we got a temporary boost, but in the end, the Federal Reserve will tell us when the down cycle is over, either by stabilizing rates sooner than expected, or (what we believe is more probable) it too will over-shoot interest rate increases and be forced to reverse course. In any case, as stated in last week’s newsletter, our bold prediction is Summer at the earliest or possibly into 2023, if the economy is resilient enough. I’d love to be wrong.
In last week’s newsletter we also stated the current strategy is to let cash accumulate. “Buy when there is blood in the streets,” is the famous Nathan Rothschild quote, but that can’t be done unless we have cash to do so. So, we will let cash accumulate. We will hold our ground, we will let others act on emotion, we will act like we’ve been here before - because we have - and we eventually will buy their shares at a discounted prices and emerge stronger in the months to come.
Have a great week! Thank you for your trust.
Side Notes That May Help
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Disclaimer: This newsletter represents the opinions of Crosby Advisory Group. Investing involves risk, including the potential loss of principal. Understand all risks and fees before investing. Not all investments are suitable or all investors.
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