Hello everyone,
I'm not sure what to say other than I think I'm eating crow pie right now, lol! Last month, I set the stage for a questionable May, but it has been a fabulous month thus far for financial markets: the S&P 500 is up 5.4% (as of May 21st) and the TSX is up 3.4% (Ycharts, ^SPX, ^TSX, Data). Perhaps those Wall Street charts watchers were right, washed out and deep oversold positions last month gave birth to a near term bounce. But this also gives rise to their concerns whether consolidation is still ahead. So, the question looms: is a "Correction" coming?
Maybe, but investors seem overly joyed with the advent of slower economic growth and after three consecutive months of hotter-than-expected inflation, consumer prices in the U.S. have finally abated in April (TD Economics, Bottom Line May Edition). Also contributing to the euphoria were corporate earnings, as they have been nothing short of excellent (US Wealth Management, US Bank). As such, all three indexes have set record highs this month: the TSX 22,554, the S&P500 5,308 and the Dow Jones 40,070.
The rally is widespread. It isn't isolated to just one or two sectors, it's all sectors with the exception of real estate. Not surprising though, the real estate market is highly sensitive to interest rates. The same can be said for smaller cap stocks. Higher rates matter for smaller companies that must borrow to fund operations. Where in comparison, larger companies that have low debt levels and cash on hand, normally weather these types of business environments very well.
Here at home, real estate isn't all that hot either. Housing starts were firm in April but nowhere near the levels required to hit federal targets under the new affordability plan (TD Economics). To make matters worse, existing home sales continued their slouch in April. Sales are down and benchmark prices remained flat. Good news I guess if you're a buyer, prices will likely continue to decline, or what agents refer to as a "Price Adjustment".
So, back to my question: is the "Correction" coming? It depends on three themes. The first is, the inflationary trend and what the Federal Reserve (the Fed) does. In the U.S., inflation has finally cooled (although stubborn) but the Fed will need to see more evidence of it moving down, not just one data point. In Canada, the expectations are that cooler trends will triumph.
The second is, and in my opinion the most important, consumer spending. This is economics 101. The stronghold of any economy. Latest data shows that retail sales have slowed in the U.S. for the month of April but again, one month doesn't define the consumer. The caveat in the said above is that the U.S. continues to have a strong labour force and significant wage growth. It really is difficult to assess whether or not they'll keep spending, time will only tell.
Lastly, going hand in hand with the consumer spending, are corporate earnings and stock valuations. Naturally, if the consumer continues to spend, corporate profits will continue to post decent quarterly reports. This will be a critical direction for stocks. Here's why: corporate earnings and stock valuations are closely related, as they both play a role in determining the value of a company's stock.
Corporate earnings refer to the profits generated by a company during a specific period of time. They are typically reported quarterly or annually and provide investors and analysts with an insight into a company's financial performance. Strong earnings growth can indicate that a company is effectively generating revenue and managing its expenses, which can be seen as a positive sign for investors. This is what we have been seeing as of late.
Stock valuations, on the other hand, is the process of determining the fair value of a company's stock. It considers various factors, including the company's financial health, growth prospects, industry trends, market conditions, and investor sentiment. One common method used to value stocks is by comparing the stock price to the company's earnings, which is known as the price-to-earnings (P/E) ratio. This ratio reflects how much investors are willing to pay for each dollar of the company's earnings. A higher P/E ratio suggests that investors have higher expectations for future earnings growth and are willing to pay a premium for the stock. Think of a tech stock!
As such, corporate earnings and stock valuations are interconnected because investors consider a company's earnings performance when determining the value or price they are willing to pay for a stock. Positive earnings growth can often lead to higher stock valuations, while declining or weaker earnings can lead to lower stock prices.
Today, the stock market continues to be constructive. Earnings are moving in the right direction, consumer spending has been resilient and we know at some point, the Fed will pivot and begin their rate cutting cycle. In the interim, as I said last month, I believe markets will continue to be choppy. There are external forces still at play, the Israel-Hamas conflict, the ongoing Russian-Ukraine war and what could end up being the most contested, watched presidential election in history. These factors will ultimately draw investors' attention. But as usual, I will do my best to keep you informed month over month.
To set the stage, June is generally considered one of the worst months for investing in the stock market (Seasonal Patterns of the Stock Market, tradethatswing.com). Historically, major stock market indices tend to struggle and have difficulty generating gains during the summer, including the month of June (Best and Worst Months for the Stock Market, wallstreetzen.com).
I encourage you all to continue to look at the market with a long-term lens. Simply put, time in the market refers to the concept of staying invested in the stock market over a long period of time, regardless of short-term market fluctuations. Conversely, we all can get caught trying to time the market. Here are a few reasons why time in the market is generally considered to be better than timing the market:
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Market Timing is Difficult: Timing the market accurately and consistently is extremely challenging. Predicting short-term market movements is essentially trying to forecast the future, which is inherently uncertain. If so, I'd be in the Bahamas right now.
Missed Opportunities: Trying to time the market means potentially missing out on significant market gains. Historically, a large portion of stock market returns have come from a relatively small number of the best-performing days. Missing these days by being out of the market can severely impact long-term investment returns.
Emotional Bias: Market timing is often driven by emotions such as fear and greed, which can cloud judgment and lead to poor investment decisions. Emotional responses to short-term market fluctuations can result in buying at market tops and selling at market bottoms, a practice known as chasing returns, which can be detrimental to long-term investment success.
Long-Term Growth: The stock market has historically shown an upward trend over the long term. Despite short-term volatility and market downturns, staying invested in a diversified portfolio for the long haul has generally been a more profitable strategy. Time allows for the potential growth of investments through compounding, dividend reinvestment, and the ability to ride out market downturns.
Missed Opportunities: Trying to time the market means potentially missing out on significant market gains. Historically, a large portion of stock market returns have come from a relatively small number of the best-performing days. Missing these days by being out of the market can severely impact long-term investment returns.
Emotional Bias: Market timing is often driven by emotions such as fear and greed, which can cloud judgment and lead to poor investment decisions. Emotional responses to short-term market fluctuations can result in buying at market tops and selling at market bottoms, a practice known as chasing returns, which can be detrimental to long-term investment success.
Long-Term Growth: The stock market has historically shown an upward trend over the long term. Despite short-term volatility and market downturns, staying invested in a diversified portfolio for the long haul has generally been a more profitable strategy. Time allows for the potential growth of investments through compounding, dividend reinvestment, and the ability to ride out market downturns.
Of course, it's important to note that time in the market doesn't guarantee positive returns, and there are always exceptions to market trends, like the external forces I mentioned earlier. However, for most individual investors, focusing on long-term investment strategies rather than trying to time short-term market movements is often considered a more prudent and successful approach, to which I keep reiterating.
So, Keep Calm and Keep Investing On! But if stocks and bonds aren't your thing, try investing in beef, vegetables and chicken. I guarantee you'll be a Bouillonaire!
Until next month……….
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