May the Fourth Was With Us
Contributed by Doug Walters, Max Berkovich, David Lemire
May the fourth was a big day for Star Wars fans and (arguably) an even bigger day for investors. The Fed’s rate hike sent shares of the S&P 500 up 3%. But it was a bit like that scene on Degobah with Luke and his X-wing fighter. Just when it seemed he might be able to use the force to lift the ship out of the swamp, it sank back in even deeper. But there is much hope (and evidence) to get investors through this unusual market.
With every rate increase by The Fed, the argument that current equity market valuations are artificially high due to an accommodative Fed diminishes. Expectations are for rates to approach 3% by year-end. Yet stocks are down just 13% this year. That may not sound great (and it is not), but stocks are still up over 25% since the onset of the pandemic. Stocks were not cheap back in early 2020 and are not particularly cheap now. In other words, we are looking at a market that is perhaps more healthy now than it was when low rates and other stimuli propped it up.
Inflation remains a potential risk to growth, but The Fed made it very clear this week that they are squarely focused on finding a solution. At the moment, equity markets appear to be signaling The Fed will get the balancing act right to enable a soft landing.
Amid this backdrop, as evidence-based investors, we remind investors that now is no time to be running for the hills. We often get asked at moments like this, “what can I invest in that will not lose money?” But that is the wrong question. There are ways to avoid losing money (e.g., cash), but you will also not make money (and will not keep up with inflation). And if you think you can time entry in and out of cash, you are market timing, which is nothing more than a game of chance where the odds are stacked against you.
Instead, the better question is, “what opportunities is this market presenting to investors?” Opportunistic rebalancing of a well-diversified portfolio, with evidence-based factors at the core, will help systematically take advantage of any market weakness. There is no need to outguess the market when your portfolio is built to capitalize on its regular ups and downs.
To say US stocks were volatile this week would be an understatement. Equities had a massive May 4th rally (S&P 500 up 3%) only to give all of that back and then some on the 5th. Friday’s jobs report highlighted continued buoyancy in employment, with over 400K jobs created in March, ahead of expectations. But it was the Fed’s big move on Wednesday that is our headline of the week.
The Force of the Fed
On May the 4th (a day coveted by us Star Wars fans), the Fed appeared to have brought balance to a weak US stock market with a 50bps rate increase.
- Investors had feared the Fed might surprise with a 75 bps hike. That did not happen and The Chairman stated that 75 bps was not under active consideration for the coming months.
- Chairman Powell also took the unusual step of speaking directly to the American people about inflation concerns. He acknowledged inflation is unacceptably high and that it was The Fed’s responsibility to bring it under control.
- Investors liked the message, sending US stocks up 3% by the end of the day. However, investors capitulated on Thursday, reversing those gains. It is going to take more than the Fed’s words to appease inflation and slowdown fears.
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