Stock Market Insights: Unexpected support

BY DR. RICHARD L. BAKER, AIF® Founder & Senior Wealth Advisor at Steadfast Wealth Management

Slimy mud banks are hard to climb. There was a mud bank we liked to slide down as kids just above the pond at my Poppy’s house. My cousins and I liked climbing the slimy red clay back to the top. We could only do it if one of us put our foot against a tree or rock outcropping and pushed the rest of us back up to the top. A lot of things are doable with proper support.

The market has been doing better than expected since mid- June. The S&P 500 is up 16% since its low point on June 16, and though still down, it was only 11% below its all-time high. The market is doing well even though we still have high inflation, Russia is still invading Ukraine, and mortgage rates are 2.5 percent higher than a year ago. But, of course, a rebound like this only happens with good support. Here are a few areas of support.

First, inflation is getting better. The Headline Consumer Price Index (CPI) dropped some in July to 8.5% from June’s 9.1%. We’re seeing this, especially in durable goods, where new appliance prices have dropped three out of the last four months. Also, used vehicle prices have dropped four out of the last six months, according to LPL. So inflation is still too high but going in the right direction.

Second, it’s getting cheaper to import goods into the country, which shows that pricing pressures are improving overall. According to LPL, imported food and beverage prices dropped for three consecutive months, which hopefully means prices are returning to normal.

Third, oil prices are continuing to drop. Crude oil, which gives us gasoline and diesel fuel, was $123 on March 8, $122 on June 8, $104 on July 8, and down to $90 per barrel on July 8, according to Yahoo Finance. It takes two weeks for these prices to affect our gas pumps. This relief affects the pricing on almost everything we buy because of built-in delivery costs.

I think these positive numbers are why stocks recovered halfway back to their all-time high. This latest rally has made the risk-reward for stocks more balanced. But, at the same time, the Fed still doesn’t have a good batting average, and several geopolitical conflicts could slow or even reverse some of this market rally.

I still feel stocks have more room to run through year-end and into 2023, but I think it makes sense to have core bonds in a diversified portfolio. I still like stocks over bonds for the rest of this year, but because stocks tend to be more volatile in August and September, core bonds are often a great way to diversify equity market risk.

Looking back at that red clay bank, we could only climb it if whoever had their foot against a tree didn’t lose their footing. I’m hoping this market support won’t lose its footing either.

Have a blessed week!

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