Will there be a year-end rally?
Last week, there was a lot of speculation about whether the United States will see a year-end stock market rally. Some say yes, and some say no.
For example, at Bank of America, “Chief investment strategist Michael Hartnett broke from his usual bearish view to say technicals no longer stand in the way of a year-end rally for the S&P 500 Index. Savita Subramanian, head of U.S. equity and quantitative strategy and an optimist on stocks this year…[said] a contrarian indicator from the bank is also close to offering a buy signal…,” reported Alexandra Semenova and Farah Elbahrawy of Bloomberg.
In contrast, Morgan Stanley’s Chief U.S. Equity Strategist Mike Wilson thinks a fourth-quarter rally is unlikely. One bearish sign is that some higher-quality mega-cap growth stocks traded lower even after reporting strong earnings. In addition, “given the significant weaknesses already apparent in the average company earnings and the average household finances, we think it will be very difficult for these mega-cap companies to avoid these headwinds too...Finally, with interest rates so much higher than almost anyone predicted six months ago, the market is starting to call into question the big valuations at which these large cap winners trade.”
The bottom line is no one knows with any certainty what the future will bring.
Instead of trying to predict market lows and highs, we help investors manage risk by building well-allocated and diversified portfolios that are designed to help them meet their financial goals. These portfolios typically include a mix of stocks, bonds and other assets. By holding a variety of assets that respond differently to market conditions, investment portfolios may provide more consistent and less volatile returns over time. It’s important to remember, though, that while diversification is a valuable tool, it does not ensure a profit or prevent a loss.
After three months of weakness, investors cheered last week’s gains in U.S. stock and bond markets. Major U.S. stock indices moved higher over the week, and yields on U.S. Treasuries moved lower.
PREDICTIONS VS. REALITY
It is notoriously difficult to predict the future, but that doesn’t stop people from trying. In 1904, a banker advised Horace Rackham not to invest in the new Ford Motor Company because, “The horse is here to stay, but the automobile is only a novelty — a fad.” Fortunately for Rackham, he was persuaded otherwise.
In 1950, the New York Time’s science reporter predicted a revolution in house cleaning by 2000. Since everything in a home would be made of synthetic fibers, cleaning would require a hose, some detergent, and a few well-placed drains. While many things in homes are made of synthetic materials, hosing down the interior is not a practical method for cleaning.
One problem with predicting the future is that forecasts are based on current knowledge – and unexpected things happen all the time. For example, during the past three years, we’ve experienced a few unexpected events:
- A pandemic that caused economies to lockdown around the world,
- A war in Ukraine that caused a sharp increase in energy prices,
- Aggressive central bank tightening in many countries,
- A war in Israel that could expand into the Middle East, and
- Harry Styles on the cover of Better Homes & Gardens.
To get an idea of how difficult forecasting is, let’s step back in time to 2020. In January 2020, the Congressional Budget Office (CBO) released The Budget and Economic Outlook: 2020 to 2030. The CBO forecast the U.S. economy would grow 2.2 percent in 2020, and unemployment would be 3.5 percent. Then the COVID-19 pandemic arrived, and the economy went on lockdown. By the end of 2020, the economy had shrunk by 2.2 percent, and unemployment had risen to 8.1 percent.
Forecasting proved to be challenging in 2023, too, as the table shows. At the start of the year, the CBO expected economic growth to be very weak (0.3 percent), following aggressive Federal Reserve rate hikes. Instead, as the table shows, economic growth exceeded expectations largely because of strong consumer spending. In addition, inflation and unemployment were lower than forecast and the 10-year Treasury rate was higher.
While many organizations, teams, and individuals try to predict the direction of markets and economies, it’s not an easy thing to do.
By Christian Cordoba
CERTIFIED FINANCIAL PLANNER™
Founder, California Retirement Advisors