Historical Volatility
As volatility remains high, we continue to look back at the history of the market to see what could lie ahead as we get closer to the midterm election. The market has historically shown strength in the months after the midterm elections. What we found out about the S&P 500 is when it has been down 25% or more, which is rare and only happens about 1.5% of the time, the historical returns of the market going back to 1950 have performed well three months to a year after. Past performance is no guarantee of future results, but as volatile as the markets have been, it’s important to point out that we’ve been here before. We’re watching carefully to see if history is any indicator for the next few months.
Technical Analysis
After another choppy week in the markets, you will see in a chart shown in this episode that the S&P 500 finished last week at a price of 3,583. From a technical analysis standpoint, we would like to see the S&P 500 push through 3,800, which is a near-term resistance level that would help us get closer to the important 50-day moving average of 3,933. We will be watching these numbers closely as the week progresses.
Inflation
Last week, we pointed out how the inflation number was the most important data point coming out. We said how the market reacted to that data would also be very important and it definitely didn’t disappoint. On Thursday, when the inflation number came out, if you were watching the stock market you would know that there was not a dull moment. Inflation was expected to be 8% but came in a little bit higher at 8.2%. We saw the market sell-off drastically that morning, but we may be hitting an inflection because the market hit a low and then rallied to close the day much higher. We may be at an oversold point and all of this bad inflation data may be priced in. On a chart shown in this episode, you can see while the year-over-year average is 8.22%, the only two data points that go into inflation that are higher than average are the food and transport numbers. These are energy and the things you see when you’re driving to the tailgate on the weekends. These are things that people buy daily. These are things that consumers can see and feel are at their highest point. Most goods and services are below average. Housing, which you don’t buy every day, is below the average as well as medical care, apparel, and recreation. All of these are also things that people spend money on but not on a regular basis. Those are items that you don’t see inflation while driving down the interstate as you do for gas prices. There’s some hope and while it may not feel like it right now as you go through your daily activities, with time and as life happens when you do things like buying a new suit or going on vacation, you will notice that those prices aren’t moving nearly at the same rate and are lower than the average inflation rate. There could be some upside which could be what the market is seeing.
Interest Rates
Interest rates moved drastically higher last week. This data point is painful in the short term because higher interest rates bring the prices of bonds down, but in the long term, you’re able to get a high return for a very low cost in terms of risk. Right now, the two-year treasury yield is yielding almost 4.5%. This time last week it was lower. That was a big move up for what is typically an extremely stable asset class. This is something we are watching closely to see how the market is reacting to each data point. Inflation is hitting our clients on a day-to-day basis and we’re seeing that firsthand. The market’s reaction is really what we’re watching for to see if there are any moves we need to make because of its reaction.
Earnings
Earnings usually is a driving force for markets. While we’ve seen earnings estimates come down for the year, according to analysts, that report is not necessarily a bad thing. We expect the earnings per share (EPS) growth to be below eight for next year. Earnings season just kicked off last week and we’ve already seen about 10% company’s report and are beating estimates at a 69% clip. That’s not something that you see typically in a bad market, which is what we’ve had. Earnings are doing great so far, and we haven’t even had any energy companies report yet. They’re supposed to be leading the way above and beyond every other sector. Three’s a little positive light as we start earnings season. Hopefully, this will lead the market higher. We have lower expectations, so we are hoping for a surprise to the upside.
Greg Powell, CIMA®
President and CEO
Wealth Consultant
Email Greg Powell here
Bobby Norman, CFP®, AIF®, CEPA®
Managing Director
Wealth Consultant
Email Bobby Norman here
Trey Booth, CFA®, AIF®
Chief Investment Officer
Wealth Consultant
Email Trey Booth here
Ty Miller
Associate Vice President
Email Ty Miller here
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.
Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.
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