In a meeting last week, a client mentioned how they are worried about the conflict in the Middle East and with Russia and Ukraine and asked if they should reduce risk to stocks until the situation calms down. In this episode, we want to share our thoughts on that topic. There is a humanitarian crisis that obviously cannot be ignored. However, how do these conflicts impact the markets and economy? The first area we are watching is the impact on natural resources, such as the price of oil, because that will have the most significant impact on inflation, profits, and consumer spending. We’re also watching the shipping and logistics issues in the Middle East, which will continue to have an impact on inflation. When it comes to the impact on the stock market, historically, the market shrugs off these types of geopolitical events. When you look at how the S&P 500 has performed around invasions and conflicts since 1950, including Russia invading Ukraine, the market has historically recovered in the months following these events. While each conflict is different, it has historically been a prudent investment strategy to stay invested in a diversified allocation based on each client’s long-term plan. We will continue to observe the current conflicts, but it’s important to know this isn’t the first time and will not be the last time geopolitical conflicts cause market volatility.
Inflation and Interest Rates
Out of all of the economic indicators that we track, the inflation report is the one that our clients feel most directly and is the one we look at for markets and planning, along with the cost of goods. The headline CPI is going to hit the print tomorrow. There are a lot of different inflation indicators, such as Core PCE, PPI, Core CPI, Super Core CPI, and more. A lot of those are essential, but a lot of them are also noise. We keep an eye on the headline Consumer Price Index because that’s what most people feel and is the one that’s been tracked the longest. Many economists are trying to cut out parts of the inflation that they don’t like. Here at Fi Plan Partners, we look at the overall picture. Data shows that there has been a clear downward trend of inflation since 2022, going from 9% down to 3.35%. However, when you drill down and analyze the data, it shows that inflation has been in an upward trend over the last few months, which is concerning. It may be a down from 2022, but the Fed is watching this concerning up trend, where inflation doesn’t seem to be going down to the 2% rate target that we’ve been used to over the last few decades. It’s stubbornly staying above 3%. Tomorrow’s report is expected to show that inflation has dropped below the 3% range. If it does, it will break the recent uptrend in place since June of 2023, which is a multi-month trend, not a short one. This is something we are watching very closely and are not very optimistic about because we have seen inflation surprise us to the upside over the last few months. This might be something that the Fed is seeing that the market isn’t anticipating. We’d like to see inflation come down and continue on a downward trend. The Fed was late to the game, so to speak, and the fear was that the Fed would drop rates too fast and that inflation would come back bigger than ever. The biggest risk now is that they step away too soon. Traditionally, inflation comes in multiple waves due to the Fed backing away too soon. When the Fed steps away too soon, and money starts to be printed again, inflation comes rolling back. It’s really important that the Fed does not count this as a win. At the end of last year, there was a lot of talk about the Federal Reserve taking a victory lap and claiming success over inflation, which is a little concerning, considering we still see inflation well above the target. This is something we plan to keep an eye on moving forward.
The Magnificent Seven
Over the last year, there’s been a lot of talk about the Magnificent Seven and how concentrated the market has been. The Magnificent Seven are the seven largest companies in the world and makeup about 30% of the S&P 500. This number is outsized compared to historical comparisons but can be justified. According to the S&P 500 2023 earnings performance data, the Magnificent Seven grew earnings by 31% while the other 493 stocks grew at 1.9%, putting the overall S&P 500 growth at 6.2%. In the fourth quarter alone, the Magnificent Seven grew earnings by 60%, contributing to the S&P 500 overall being up a total of 7% in earnings. The remaining 493 of the stocks were down about 3% on earnings. Moving forward, we would like more broad-based participation, especially on the earning side. In 2024, the Magnificent Seven is estimated to contribute about 21% to earnings growth, with the rest of the 493 stocks estimated to contribute around 6%. It’ll be important to see how these ratios play out throughout the year. An overall 9% earnings growth to the S&P 500 would be a bright sign and would build off last year’s subpar earnings performance from the rest of the stock market.
Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
No strategy can ensure success or protect against a loss. Stock investing involves risk including potential loss of principal.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.