With this morning’s inflation numbers coming in lower than expected, the market is up a ton. One data point does not constitute a trend, and no one knows where the market will be later today, next week, next month or even next year. But over the long-term it IS going higher, and right now is a GREAT time to be an investor. This report shares some brief thoughts and ideas on where you should be invested going forward.
Current Market Conditions
In case you’ve been living under a rock, stocks are down big this year because the extraordinary pandemic stimulus created a bubble—that led to inflation—and now the central bankers have done a complete 180 on interest rates. As rates have been climbing very fast, stocks have been getting slammed because higher rates are slowing economic growth.
Enter this morning’s October Inflation numbers. Inflation is still high, but not as high as expected. And this creates hope the Fed can FINALLY ease up a bit on its high rate hike trajectory that has been crushing the market.
Lessons Learned
One data point and one day in the market does NOT constitute a trend. And if you’ve been sitting in 100% cash all year, you’ve successfully missed out on a lot of stock market declines. So to anyone trying to make you feel bad for holding cash and missing today’s rally—tell them to check out the year-to-date scoreboard.
Going forward, the market IS going higher. But, like always, it’ll be a bumpy ride. If you are are long-term investor—NOW is a GREAT time to own stocks. Prices and valuation are down, but businesses will prevail, and when the central bankers ease up (now seemingly sooner than later) stocks truly are going to keep soaring higher. And as you benefit from growth on top of growth in the years ahead (compound growth is the 8th wonder of the world) your financial situation will be grateful.
How to Play the Market Now
First and foremost, stick to your personal long-term goals. This year’s volatility has led to a lot of fearmongering and nervous investors. And some investors may have caved to the noise, and adjusted their investment strategies inappropriately (for example, letting fear dictate your trades). If you’ve been hiding in cash, you are missing this morning’s rally, but there is a lot of upside ahead.
Value stocks have dominated growth stocks this year, and that may continue in the years ahead as the short-term volatility smoke clears. Now that interest rates are higher, they probably not coming back down to 0.0% again anytime soon. In fact, the fed will very likely keep raising rates into early next year (hopefully just at a slower rate and to a lessor extent than was expected yesterday before the October inflation numbers came out). Rates are now more consistent with historical levels, and there should now be a new premium added to value stocks going forward (unlike the premium that was added to growth stocks during the pandemic when rates were 0.0% and governments were throwing free stimulus money everywhere).
Politics
Obviously, there was a mid-term election this week, and the results are still not certain. Some argue that gridlock would be good for the economy (i.e. a split between the party in the White House and the party in control of Congress). That seemed to be the consensus going into the elections, and may or may not be the result when the final tallies come out. Either way, the market hates uncertainty, and final results could be good for the market.
Income Investors
We’ve shared a windfall of top investment ideas in recent weeks, including these two recent top ideas report:
And we will be providing our November update to the Income Equity Portfolio soon (i.e. we will be updating “buy under” prices and holdings weights).
Growth Investors
Growth stocks are due for an incredible rally, and we’re seeing a lot of that today. We could see a lot of pent up buying desire released (diving markets higher) and a lot of short sellers ceasing (which could also add upward pressure to stocks, particularly growth stocks). Many of the names in our Disciplined Growth portfolio currently trade at very attractive prices and have A LOT of upside potential.
The Bottom Line
Two takeaways actually. One, this year has been tough with volatility high and markets down. It’s okay to use this volatility to be a little opportunistic, but do not lose sight of your long-term goals. Disciplined long-term investing is a winning strategy.
Secondly, and finally, today’s new inflation numbers are THE positive metric the market has been waiting for. One data point doesn’t make a trend, and things can reverse quickly in the market (as you know), but stocks are down yet business will continue to thrive in the long-term. If you’ve been waiting to invest, now is a great time to be an investor.