Markets Rebound – August 2022

The US stock market is down 10-15% on a year-to-date basis through July 31, 2022 and remains in “correction” territory.    

Markets rebounded in July with a 7-10% gain as investors believe the FED may not have to ratchet-up its interest rate projections.  The Fed’s swift increase in interest rates this year is intended to reduce demand and thereby inflation.  The rise in interest rates is delivering the intended result with the economy clearly slowing down.  The Bureau of Economic Analysis “BEA” reported US Gross Domestic Product “GDP” declined for the second consecutive quarter in June 2022. The second-quarter decline reflected decreases in private inventory investment, residential fixed investment (housing), federal government spending, state and local government spending, and nonresidential (business) fixed investment. These declines were partially offset by increases in exports and personal consumption expenditures. While there is debate as to whether we are in a recession or not, the economy is weakening.

Companies continue to report earnings growth and are expected to deliver 10% and 9% earnings growth for 2022 and 2023, respectively.

The stock market’s price-to-earnings “P/E” ratio is 16.5x 2023 earnings, in line with its average over the past 25 years.  Stock prices are a function of interest rates and earnings.  If our economy continues to weaken into a prolonged recession, earnings estimates will likely decline, and the market may very well take a leg down once again.  This cycle will run its course over 12-18 months from the beginning of 2022.  This leads us to believe the US stock market will be materially higher by mid-2023.

We are optimistic about the stock market for the next 18 months! Yes, we are!

Investor and consumer sentiment indices are in “extreme negative” territory.  And when this occurs, almost without exception, markets reverse and turn positive over the subsequent 18 months.  When the negative components of the outlook begin to turn positive, the stock market typically responds positively and swiftly.

Richard S. Lawrence, CFA / August 2, 2022

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PREPARE FOR SHORT TERM STOCK MARKET DECLINES!