Markets may be normalizing, depending on inflation results




This year has been a whirlwind of investor disappointment with inflation driving the bulk of the chaos. Even though stocks are historically good for inflation, Federal Reserve intervention and terrible headline news can shake stocks in any environment. Prospects may be turning up if the Fed overshot inflation projections. However, any higher inflation scenario, caused by the war or increasing domestic consumer demand, may send stocks lower, even from here. Here are some things to look out for.


The S&P 500 “SPY” is down 19.77% year-to-date, which is how most investors measure market performance. International markets performed the same and emerging markets, as measured by iShares Emerging Market Index “EEM” is down 18%. The blunt force against these indexes was from the tech and biotech sectors, largely known to be hypersensitive to interest rate changes. The Invesco QQQ Trust “QQQ”, which measures the NASDAQ heavy tech sector, is down 28% YTD. The long-term US Government Treasury Bond “TLT” is down 22.35%. There was nowhere to hide for a traditional investor.


Commodities were 21.89% higher this year as measured by the tradable index “COMB” and its success can directly be attributed to high oil/gas prices and war-driven inflation. Due to its natural riskiness, most investors don’t have more than 5-10% allocated to their portfolios. Holding even a small amount can make all the difference.


There is some good news, believe it or not. Many economists believe that inflation assumptions are over-dramatized and if the Federal Reserve can limit future rate increases, this may be what’s needed to move markets back higher. Oaktree Capital Founder, Howard Marks, points to the aggressive capital investment in the private sector. “That’s bull market behaviour,” said Marks.”^1


Signs of life are emerging in certain, traditionally high-risk stocks, which may be a predictor of higher markets to come. Tesla, Microsoft, Apple, Google, among others, have recaptured their 50-day moving averages, which is a technical bullish signal some traders use to gauge the future of markets.


Investors still benefit from dividend and interest income as this is based on the number of shares held and not on the portfolio value of the day. And, in many cases, more common with bonds, income increases when prices fall. The SPDR Bloomberg High Yield Bond ETF “JNK” is down 13% YTD but has doubled its interest payment to 6.97%/year.^2 Those who went to cash will miss out on the highest interest income opportunity in decades.


Investors should remain vigilant. Nobody can predict how far the war will go or how inflation will force the Fed to rise rates further. There are many risks that await us but it’s still better to be invested to enjoy the income that comes with it.


At Eureka Wealth Management, I help clients manage their investment strategies during times of turmoil and uncertainty. I also do financial planning and tax/estate strategies. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.



Sources:

^1 FT 6/27/22 “Time is ripe to snap up ‘bargains’, says distressed debt king Marks”

^2 https://finance.yahoo.com/quote/JNK?p=JNK&.tsrc=fin-srch