MONEY MATTERS

Market Predictions

The title of this month’s article is a little misleading, as I do not like making predictions, especially when it comes to the stock market. It’s always humorous to hear the media making their annual predictions for the New Year. I have a hard enough time predicting what a week out in my life may look like, much less a market with a number of moving parts, people, institutions, etc, who shape it. I would prefer to focus on facts instead of making predictions.

What facts might I be talking about? n Interest rates are still low but likely rising n Inflation is the highest it’s been since the late 1970s/early 1980s. n Unemployment is very low, and anyone who wants a job can typically find one. n Consumer balance sheets are strong with lots of cash in the bank. n Corporate profits have risen and are still rising with S&P 500 profits in 2021 at all-time highs. n China and Russia are currently dominating the news with Taiwan and Ukraine.

The above is just a small snip of what is going on in our economy and the world. There are a million things more that could be listed. Next year, the list will change with some to the good and some to the bad; however, nobody really knows.

I believe the best thing to focus on is where we are today and plan accordingly. In saying this, rates are low and rising. If you understand how bonds

work, if you own an already issued bond and rates rise, the value of that bond falls. The opposite is also true. If you own a bond and rates fall, the value of that bond increases. I’m not going to get into the weeds on why but just know this is what happens. With rates looking to rise and having risen, bonds, especially investment grade bonds, have struggled and may continue to struggle. What were once risk- free returns are now return free risk. Right now, investment grade bonds, CDs and money markets are all returning a negative return when adjusting for inflation.

How about stocks? The value of any stock is the present value of its future cash flows discounted at an appropriate rate. This discount rate will rise if rates rise, lowering the present value of the future cash flows. However, stocks have a couple components that bonds don’t have. They don’t have a set interest rate where if you hold a stock for a set timeframe you have a limited upside, such as the case with bonds. Therefore, stocks have the ability to appreciate meaningfully higher due to the earnings that are backing stocks. Companies earn profits and over history have done a fine job at increasing those profits even after adjusting for inflation. Also, stocks have a multiple attached to them. This multiple can also play into the pricing of the asset giving it further room to expand. There are also downside risks to stocks because at any given point companies can hit rough patches and earnings decline along with multiples declining depending on how much investors are willing to pay for those earnings. At the end of the day investing is all about trade-offs and opportunity cost. Right now the way I see it, bonds are risky historically speaking after factoring in inflation. They can serve the purpose of ballast in a portfolio, but expecting a real return if rates continue to rise is being naïve. The one prediction I will make is: I still believe the trade-off of volatility and opportunity cost favors stocks. I do believe that as time marches on, our society at large will become more productive and efficient allowing profits to grow, reflecting in the share prices of their assets in markets. I believe we will have tough stretches, but so does life.

What will happen with markets in 2022? I’m not sure, but I will evaluate the options based off where we are now and the trade-offs. Opportunity costs when evaluating investments.

MONEY MATTERS Lee Williams

Lee Williams offers products and services using the following business names: Nowlin and Associates – insurance and financial services | Ameritas Investment Company, LLC (AIC), Member FINRA/ SIPC – securities and investments | The Ascent Group, LLC – investment advisory services. AIC is not affiliated with Nowlin and Associates or The Ascent Group, LLC.