The Stock Market Is Strong. Should I Be Concerned?

It's a fair question. Capital markets have outperformed so far this year. How do you interpret this? Let's look at the facts --

Despite jitters over persistent inflation data, the economy continues to hum along. Optimism for the long term within American business is strong. Unemployment continues to be historically low, at 3.8% nationally. According to a recent survey by The Center for American Progress, 6 in 10 workers are now beginning to see real wages catch up with inflation. It can't come quick enough!

The expectation is these wage numbers will continue to rise for most Americans over the next few years as employers seek to keep and attract employees in a tight labor market.

As of March 2024, inflation using the consumer price index (CPI) measure was up 3.5% when looking at the prior 12-month period. This is an increase in CPI, where the prior month's reading was 3.2%. This was enough to give economists and Fed-watchers pause.

As recently as a couple months ago, it appeared that the Federal Reserve would be cutting interest rates this year. General consensus was three 0.25% rate cuts in 2024. This may yet happen, but much less likely with inflation still up. It is looking more likely that interest rates will remain steady this year. Rates will remain “higher for longer”, as Fed Chair Jerome Powell expressed last year. Whether we cut three times or hold steady, keep in mind that in both scenarios interest rates are high (not higher historically, but higher than we’ve seen in recent memory). If we do have rate cuts they will not be significant. There is no expectation that rates will be going up again. In other words, Jerome Powell and the FOMC will proceed with cuts cautiously. Expect the Fed to do what government bureaucracy does best – do nothing. The Fed will be more reactive than proactive here, as is typically the case.

Assuming little change in interest rates, what does this mean for your investment portfolio? While a correction is bound to happen, and a healthy part of markets, we see no signs of a serious crash in the near term as we saw in 2022. Aside from the reasons cited above, despite the challenge of inflation, businesses are still growing at an increasing rate. American consumer spending (which make up 70% of the U.S. economic activity) continues to be robust.

Aside from the overall positive data we see, another important reason why we think our current uptrend in markets isn’t over is because many investors are still on the sidelines out of fear. In other words, there is a lot of dry powder that hasn’t been invested/reinvested – yet. At some point this will change. When we have greater investor participation, that will be the time to become more concerned about a bubble. Even so, if you are invested according to your risk tolerance and time horizon, you will be well-prepared to withstand the volatility ahead.
 

Jonathan Cameron, CFP®

(photo image by Patrick Weissenberger)