The first ten months of 2023 have been full of mixed signals, to say the least. A surprisingly resilient economy and excitement around emerging AI technologies have some analysts feeling optimistic. Others are concerned that the mounting risks associated with higher interest rates could lead to recession.
Stock market volatility returned this Fall, leading many to question the legitimacy of the early 2023 bull market-like returns. In this article, we’ll take a look at the current investing environment through both the bull and bear market lenses.
The Case for a Bull Market
Despite signs of a slowdown in economic growth, the US economy has demonstrated remarkable resilience in the face of the Federal Reserve's interest rate hikes. If the Federal Reserve can tackle the inflation problem while avoiding a recession, the market could respond positively.
One piece of evidence those in favor of a bull market are quick to point to is the rise of artificial intelligence. The explosion of interest in AI after the debut of ChatGPT has been a primary cause for the 2023 upswing in market performance, particular amongst growth stocks. The hope is that as companies adopt new AI technologies, the efficiencies they generate will lead to stronger earnings over time. The market has embraced this potential, resulting in a notable rebound in stock prices for tech giants like NVDA, GOOG, META, AAPL, and MSFT.
In addition, market optimists are getting excited about the potential for the Fed to end their rate hiking cycle. Emerging signs of economic weakness may be the reason for the Fed's current pause, however, researchers are quick to point out that the Equity and Core Fixed Income markets tend to outperform their long-term averages in the 1-5 years following the last rate increase.
The Case for a Bear Market
For every glass half full analyst out there, there’s a glass half empty one ready to throw some water on your optimism.
One argument in favor of a bear market also has to do with the Fed’s recent commentary around interest rates. Due to the economic resilience and somewhat stubborn inflation figures, the Fed now says that they plan to keep interest rates higher for longer. The bond market quickly responded to that rhetoric as seen by the recent spike in the 10-year Treasury yield. Higher rates are concerning because of the effect they could have on corporate earnings and the overall economy. In general, higher rates can put a damper on profit margins, future business investment, consumer spending, and economic growth. Throw in a couple of wars and worker’s union strikes and suddenly, the economic risks seem to be mounting.
A similar pessimistic interpretation could be applied to the surge in tech stock prices thanks to the excitement around AI. This boom led to substantial valuations (reflected in high price/earnings ratios) for some of the top tech companies. With those sky-high valuations comes equally lofty expectations. Should these companies fail to meet the market's anticipations, their stock prices could fall, sending ripples throughout the market.
How You Should Respond to This Current Market
There are three crucial investment principles to keep in mind as you navigate managing your investments in this current market environment.
The first is to consider your short-term cash needs. With uncertainty in the market, we recommend that clients prepare the cash that they anticipate spending over the next 6-12 months. This cash can sit in a money market fund earning 5% in the meantime.
Second, for longer-term investments, it’s important to stay disciplined, diversified, and recall the goals for each investment. Continue adding money to retirement plans and maintain a healthy allocation to stocks, which have proven to outperform inflation over time. We recommend a diversified portfolio that consists of U.S. and international funds, as well as funds that vary in size — owning large, mid, and small cap companies across all sectors of the global economy.
Finally, avoid making investment decisions based on emotion. News headlines are designed to stoke your emotions — typically either greed, anxiety, or fear, which can all lead to rash decisions that could negatively impact your long-term financial plan.
Encompass Wealth Can Help You Grow in the Midst of Uncertainty
When navigating murky or uncharted waters, it’s always helpful to have a guide you can trust. Consider reaching out to connect with an Encompass advisor today! We’d love to talk to you about how we can manage your investments and help you meet your financial goals in this uncertain climate.