As you can see in the following chart, the market (as represented by the Nasdaq 100 (QQQ)) has been terrible this year, but things have perked up in recent weeks. This update/report reviews the causes of this year’s declines and the data points supporting continued recent market perkiness. We conclude with our strong opinion on how you may want to position your investment portfolio going forward.
Why the Market is Down This Year
If you have been paying attention at all, you know why the market is down this year. It’s because the stimulative monetary and fiscal policies implemented to offset the negative economic impacts of the pandemic basically drove valuations to nosebleed levels. And now the side effect of those policies is sky-high inflation. To fight inflation, the fed had done a complete 180 and is now dramatically raising rates. Of course the side effect of this new policy is that higher interest rates slow the economy. And on Thursday, the US just reported its second consecutive quarter of NEGATIVE GDP growth.
Two consecutive negative quarters of GDP growth is a quick rule of thumb indicating we are in a RECESSION. And considering the market is still down so much this year, and inflation is causing people a lot of economic pain, the recession is very real to a lot of people.
What are the Data Points Saying Now?
In addition to negative GDP growth and sky-high inflation (CPI is over 9% YoY), the market is obviously down a lot. But as you can see in our earlier chart—things have perked up over the last few weeks. In fact, the Nasdaq 100 (black and red line) is now above its 20-day moving average—and it seems to be holding that level (a good sign).
Another good sign is that on Wednesday, the fed announced another 75 basis point interest rate hike (as expected), however Chairman Jerome Powell noted that the fed could slow the pace of future hikes—and the market loved this because it means a better environment for economic growth than expected.
The 10-Year US treasury is another great bellwether interest rate indicator because as it rises—the stock market tends to slow, and when it falls—the stock market rises (this has been strongly true this year). And the 10-year rate has fallen in recent weeks to 2.685% (from a previous high of near 3.5% back in June—when the market was at its lows). The lower 10-year yield is another good sign for the markets.
The stock market generally rises long before a recession ends (because the stock market is forward looking), and considering the 10-year rate is down, the fed gave some positive news on Wednesday and QQQ seems to be holding above its 20-day moving average—these are all very good signs for stocks!
Conclusion:
Using economic data points and technical analysis can be useful methods for interpreting (and even predicting) short-term market moves, but the reality is—no one can accurately predict where the market will be in 1-week, 1-month or even 1-year. However, over the longer term, the economy will get better and the stock market will eventually go higher. There are simply too many great business supported by hard-working ingenuitive people for the economy and the markets to not go up in the years ahead (not to mention, valuations are a lot more reasonable now than they were last year).
And a few years down, there will likely be a lot of people kicking themselves for sitting in all cash (instead of investments) because they are afraid of what might happen in the short term. Rather, disciplined goal-focused long-term investing has proven to be a winning strategy over and over again throughout history—and it will this time too. Know your goals, stay focused on your long-term strategy. Your future self will thank you.