Stock Market Insights: Uncertainty

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

Our crazy dog was barking at a “dragon.” What she thought was a dragon was actually a John Deere tractor with the forks attachment on the front-end loader that I’d parked in the yard while she was in the garage. But to our dog Molly, the headlights looked like eyes, and the forks looked like scary teeth, making her scared and uncertain. I think investors are feeling a little uncertain, too.

The last several weeks have seen a very uncertain stock market due to high inflation, Putin’s war, and rising interest rates. With these things in mind, here is what I’m thinking about for the rest of 2022.

There are still some challenges ahead for the economy as the Federal Reserve continues raising rates to rein in inflation. Though late to the game, I think they are doing the right thing for the long-term health of the U.S. economy, but it does increase short-term volatility.

The good news is inflation is slowing. We’re seeing gas prices, agricultural commodity prices, apartment rents, and many import prices decline. The Fed is expected to be less aggressive when we have a longer pattern of falling prices. Some of the recent market volatility is because we have had mixed inflation signals. As inflation continues to pull back, I expect volatility to fall and investor confidence to improve.

The bearishness (negative views of the market) right now is very high, but we must remember that historically high negative sentiment is often followed by strong market performance. For example, the American Association of Individual Investors (AAII) has been doing weekly surveys since 1987. Last week’s survey had a level of bearishness seen only four other times before. S&P 500 returns a year later in those cases averaged over 30%. I don’t know whether that will happen again, but it’s important to remember this isn’t the first time it has felt this way, and it worked out.

Three positives. We are about to go through some of the best months of the market year; November through April are historically solid months for stocks. Stocks often do well after mid-term elections. And the third year of the four-year presidential cycle (which we enter in 2023) has historically been the strongest for stocks.

Molly dog wouldn’t stop barking until my wife put her on a leash and walked her around the tractor to prove she wasn’t in danger. She just needed a little time and perspective.

The recent market declines are upsetting, and we don’t know when the volatility will end. But we do know that conditions show that better times are ahead.

Have a blessed week!

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