The market has been responding to the expectations of when we get to “terminal” interest rates in terms of the current tightening process, and trying to determine if we are at peak inflation. Since Jackson Hole, the market has adjusted to thinking rates may have to stay higher a little longer before there is a pause. Many indicators show that inflation has peaked and will mitigate soon, but CPI is a lagging indicator so even if we are there, it takes a little longer to show up in the numbers. Shelter (rents) and food kept core inflation high last month even though most other indicators show prices coming down.
A couple of points…
One: The last six times the economy was at peak inflation, the market went up. Four of those six times the market went up even though we entered recession.
Two: An investor needs to stay invested as you cannot time the recovery. Since 1962 in a midterm election year, the market has averaged 16.3% a year starting 11/1 and has never been down 6 months and a year later. Also, a high percentage of the one year return has taken place in the six months after 11/1 in a midterm election year with the market averaging 15.1% from November 1st through April 30th. Again, you cannot time the recovery.
Of course, our job is to do what we think is best and we believe staying invested has been proven the best idea based on a lot of history. Use facts to avoid making bad decisions. For those with dividend stocks, a reminder that you are being paid to wait.
A bottom test is typical and we still believe there is a high chance the bottom is in. I have attached the 1962 bear chart which shows the June low, bottom retest about this time of year and then the strong recovery over time. It is likely the same type of pattern created given some time. It is important to look beyond the current cycle.
As always, have a great day and if you have any questions please let me know.