John Stewart, Chief Investment Officer, Farmers Trust Co.
The Fed decided not to raise its key interest rate target at a meeting earlier this week after raising rates at every meeting since last March, as widely expected.
While our central bank is allowing for the possibility of further rate hikes in the future, it seems likely that we will be on hold for the rest of the year given improving inflation indicators.
Because monetary policy takes time to play a full role in the financial system, Fed governors want to take the time to see the effects of the steps they have taken before risking pushing the economy into a deep recession.
From a stock market perspective at least, the Fed appears to have successfully threaded the needle that few thought they could, tightening monetary policy just enough to cool inflation without causing serious economic pain.
Now that the bulls are on the parade and valuations are near their 2021 peaks, the market could be more vulnerable to downside surprises if all does not go according to plan.
Everyone becomes a sucker for a good cover story from time to time, right?
So when the popular investment publication Barron’s put a picture of a bull on its cover last week under the headline “This Market Has Legs,” people took notice.
Maybe they’ve been worried about the coming recession that people have been talking about, and now they’re more willing to put their money in the stock market because the experts have given their approval. In fact, the percentage of bullish investors jumped from 29% to 44% in the past week alone, according to the American Association of Individual Investors survey.
The problem is, once a story hits the cover, the big payoff usually already happens. You make money buying low and selling high instead of buying after we’re up 15% so far this year.
If you see a bullish cover story in a non-financial publication like Time or Newsweek, you know to be cautious, as these tend to be very contrarian indicators.
The second quarter of 2023 is drawing to a close, and soon another earnings season is upon us.
The market is already expecting earnings to be about 11% lower than last year’s second quarter, so that could be a fairly easy hurdle to jump.
Earnings expectations have also been falling slightly in the third and fourth quarters, but overall earnings are expected to be relatively flat in the second half of 2023 compared to 2022.
Given the S&P 500’s continued gains in recent weeks, the market appears to be anticipating an inflection point in earnings revisions ahead — in other words, they’re expected to start rising again.
We’ll soon find out if the market has a crystal ball for profitability, otherwise, they’ll be jolted awake.
Copyright 2023 The Business Journal, Youngstown, Ohio.
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