Resources/Weekly Insights

Volume 13, Edition 16 | July 6 - July 12, 2024

Enjoying the Ride in a Rising Market

Doug Walters, CFA

As the market pushes ever higher, calls for the next correction appear to be increasing and raising fears. Evidence-based investors know how to enjoy the ride wherever it takes them.

Contributed by Doug Walters, David Lemire, , Max Berkovich

It’s a beautiful summer day. You’re on a roller coaster, and it’s going up… and up… and up… and you can’t see the top. You start to grip the safety bar just a bit harder. That drop must be coming soon… and then fear sets in.

Perhaps this describes how you feel on one of today’s monster roller coasters. Or perhaps it better describes how you feel about the current stock market that seems only to go up. If so, you are not alone, and it has a name: loss aversion.

Height Anxiety

Investors often suffer from height anxiety. When the market seems to go in one direction – up – there comes a time when our natural human fear of losses outweighs the enjoyment we receive from gains. These emotions are loss aversion in action. As humans, the emotional experience of a 10% loss in our investments feels far more potent than an equivalent gain. That is a scientific fact.

So, what do these cautious investors do? They want to shift to a more conservative portfolio. Instead of riding the bull market up, they want to step off at a comfortable altitude. It may feel like a safe move, but if you step off too soon, you could miss the best part of the ride.

The Correction Myth

We often hear market “experts” in the media spreading scare stories about an impending market “correction,” implying a 10%+ fall in equity markets. Their stories resonate with investors who may already be nervous about other factors like the upcoming election. But these are pointless predictions. A 10% market correction is a regular occurrence, happening more frequently than once every two years.

So, they will be right – eventually. What they can’t tell you is exactly when it will happen, and it is perfectly plausible for the market to rally much further before it corrects. Evidence-based investing tells us that some will get market timing right (through luck), while more will get it wrong. It just doesn’t work.

Following the Evidence

If you are nervous about the height of the current markets, have a discussion with your financial advisor. It is possible that taking some risk off the table is the right move for you. Perhaps recent market strength has put you in a position where you no longer need to take on much market risk and can afford lower returns and increased stability. That is a long-term asset allocation decision, not market-timing. But if you are like many, and your desire to reallocate is driven more by emotion than logic, it may be best to let go of the safety bar and enjoy the ride wherever it takes you.

3.3%

Core CPI Inflation

Core CPI fell from 3.4% to 3.3% this month giving the Fed some ammunition for a rate cut.

Headline of the Week

Pivot Prep

Fed Chair Jerome Powell gave two days of testimony to Congress this week, signaling a potential shift to rate cuts. This strategy isn’t new for Powell, but current economic conditions suggest a firmer footing for such a move, particularly in light of the latest inflation report. The Fed’s dual mandate (fighting inflation and maintaining employment) came back into focus, with Powell emphasizing that further weakening in employment may be problematic. The Fed’s current high Fed Funds Rate is geared towards addressing inflation, and now the Fed acknowledges that employment is important, too.

This shifting emphasis is a crucial step in prepping markets for potential rate cuts. Markets did not react immediately. Once Thursday’s inflation report confirmed positive trends, markets were quick to shift, benefiting smaller companies and those more sensitive to the rates.

One day does not a trend make, but a changing rate outlook could give some “air” to this year’s laggards.

The Week Ahead

A rate decision from the European Central Bank, a Gross Domestic Product release from China, and the Third Plenum on top of the start of earnings season is in store for next week.

Plenuminary Results

The Gross Domestic Product (GDP) report on Monday is expected to fall short of the government’s target.

While the property market troubles have started to ease, the Chinese stock market has yet to recover from a three-year slump.
The Chinese economy likely expended 1.1% in the quarter, a slower pace than the first quarter, but on a year-over-year basis, the expansion will likely come in at around 5%.
The communist party leaders meet July 15-18 for the Third Plenum to set a 5-year plan. Anticipation from investors is running high as they want an immediate response to stimulate the economy, and the government has been reluctant to act thus far.

Drop a Hint!

After initiating the first cut last meeting, the European Central Bank (ECB) has a rate decision this week.

The ECB had mostly boxed itself in to start cutting in June, but this meeting is highly unlikely to produce a cut.
Most ECB watchers expect at least one more cut this year, and so far, President Lagarde has yet to hint at the possibility of more than one more.
Lagarde stuck to her word for a summertime cut, so she has a lot of credibility right now.

Closer to Home

Retail sales and quarterly earnings reports will be the main attractions in the States.

With the labor market showing signs of cooling, will the consumer show hesitancy to continue spending?
Expectations are that retail sales will not budge in June after a tiny tick-up in May.
Big financial firms will dominate the first full week of earnings season: Goldman Sachs (GS), Morgan Stanley (MS), BlackRock (BLK), Bank of America (BAC), and American Express (AXP). However, United Health (UNH) and Johnson & Johnson (JNJ) will also chime in.

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