Unfortunately, polarization is a defining trait of our culture in 2022. For example, most likely you love the new LIV golf league or you hate it. You love a certain politician or you hate that politician. As it pertains to investing, a lot of investors are currently gravitating into two polarizing camps… they think we are in a stock market ‘bubble’ like we saw in 1999 or they think stocks are very cheap right now because of the pullback we have seen. Since our culture encourages us to “pick a side” in most topics, we can sometimes feel lonely when we do not gravitate to either one of these polarizing camps. As of last week, we are of the opinion that stocks are fairly valued. It is important to remember that most things in life are never as good or bad as they seem – this stock market decline fits that narrative.
The good and the bad
Yes – the Federal Reserve has been and will continue to increase short-term interest rates. Yes – the government is no longer passing out “free” checks to help stimulate the economy like we have seen for the last two years. Yes – companies earnings are being affected by inflation. We understand each of these market “headwinds” but think there are combatting positives to consider as well. The CDC is not requiring testing to enter the U.S. which should increase international travel. Sporting events, movie theaters, and other large events are expected to rise this year as the public becomes more comfortable in public. Companies that made large capital investments before inflation can now charge higher rates with the inflation narrative. While some of these comments are over-simplified, the bottom line is this… we think the service sector will be one of the key drivers of economic growth over the next 12 months.
Stocks and Interest Rates
As we have written many times, stock market valuations are relative to interest rates. We were of the opinion at the beginning of this year that interest rates would move higher but they have moved much higher and much quicker than we anticipated. This makes the stock market less attractive when fixed income alternatives are yielding more. With a modest assumption of an increase in profits and slightly higher interest rates that we see today, we believe that the market is NOT overvalued.
A lot of clients have asked the good question… “won’t interest rates continue to rise since the Federal Reserve says they are going to increase interest rates for most of this year?” Since the markets are forward looking, we believe that the markets have already priced in most of these interest rate increases. It is possible that interest rates continue to rise and profits move lower; however, this is not our ‘base case’ scenario. It is possible but not probable.
Is a hurricane coming?
Many of you saw the comments made by Jamie Dimon (CEO of JP Morgan) earlier this month where is said there was an “economic hurricane” coming. Mr. Dimon is known to be quite theatrical with his economic projections and we do not put a lot of credence in his comments based on his past track record. For example, in 2020 he warned the market of potential economic destruction and an economy that would be shutdown for a prolonged period of time.
While we do believe that a recession will happen, we are not of the opinion that it will have “hurricane” winds nor do we believe that we will experience a recession this year.
Is this a 1999 stock market bubble?
Short answer… we do not think so. When we look back at history, the stock market was approximately 60% overvalued in 1999. We do not see that today in the market.
About the Author
Matt Price serves as a Partner and Director for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their three children and "Fisher" the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 11 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes everyone needs a wealth coach!
Content Is Nothing Without Context
Are you looking for a weekly financial market commentary that provides context? Sign up to receive our weekly commentary HERE. We are helping make the complex simple.
The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
Securities and investment advisory services offered through Steward Partners Investment Solutions, LLC, registered broker/dealer, member FINRA/SIPC, and SEC registered investment adviser. Investment Advisory Services may also be offered through Steward Partners Investment Advisory, LLC, an SEC registered investment adviser. Steward Partners Investment Solutions, LLC, Steward Partners Investment Advisory, LLC, and Steward Partners Global Advisory, LLC are affiliates and separately operated. The Price Group is a team at Steward Partners.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Steward Partners does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Past performance is not indicative of future results.
AdTraX 4766787.7 Exp 6/24