Is the Rally Over?
3min video
Is the rally over? The S&P500 has rallied over 10% in just under two months on the belief that inflation and federal reserve hawkishness have peaked. Let's talk about how things might get better or worse from here.
Video Transcript:
The consensus for the S&P 500 in August, 2 months ago, was 3200 -3400. But the S&P 500 is around 4,200. 6-8 weeks ago, the consensus was that we would see a new low in august. Instead, the S&p 500 has moved 1000pts higher than that expectation, which just shows how lousy prognostication can be in this type of market and why I sound like a broken record; it's about time in the market, not timing the market.
The key issue for stocks now is that the market has begun to price in perfection, where the economy will be strong enough to avoid a recession, inflation abates, and earnings will be lower but still positive. This goldilocks-type scenario is not impossible, but it should be acknowledged there are still significant headwinds that could derail this rally.
For example, if the Fed reinforces that it's not close to done on rate hikes and doesn't open the door to a pause in late 2022, or economic data falls faster than inflation creating stagflation worries, or if China locks down again, or if the Russia/Ukraine war expands. Any of these outcomes could derail the current rally.
That said, things could get better if: the Fed does hint at pausing rates, Economic growth falls slower than inflation is falling, CPI continues to drop quickly, China drops its "zero COVID" policy, and some sort of resolution is reached between Russia and Ukraine.
To get near new all-time highs would put a multiple on the S&P500 at close to 19 to 20 times 2023 S&P500 earnings, which isn't impossible. Still, that valuation is usually more in line with an environment categorized by meager inflation and accommodative Fed policy. So put in plain English, we have an improved outlook, but for stocks to move substantially higher from here, we still need to have many things go right.
I hope this video helps set proper expectations and gives you some confidence to not abandon your long-term investment plan.
As always, stay the course and stay on point.
