WAAHHOOOO, Best Month in 30 Years !!!
Pop the champagne, let the party begin…..ya, well maybe. By the time you read this the FED will have announced another rate increase – probably 0.75%. The last time I looked, Ukraine and Russia are still at war. Russia has suspended participating in the shipment of grain from Ukraine. Inflation while seeming to slow is still above an acceptable level. Employers are still having difficulty hiring enough qualified people. Gas prices are off their highs. Food is expensive. Car prices are coming down and inventory is up a bit. With the increased interest rates, real estate values have mellowed. Soooo, what is happening? Why is the stock market up?
The DOW Jones Industrial index which is comprised of 30 stocks was up 14.4% in October; the Nasdaq and S&P 500 (both bigger and broader than the DOW) are both up about 8.5% during the month. It is not merely the U.S. markets. The DAX (German) market was up 9.4% and the Japanese Nikkia was up 6.3% in October. But why? Nothing seems to be “better.” Maybe at the best, “just not worse than it was.”
The world is complex. Yet, we all seek simplistic, easy to understand, and dependably reliable answers to those many complex questions. Sorry to disappoint. It is just not that easy. I will provide a few “true-isms” in a bit but first a few more details.
The price of oil is around $86/barrel compared to $80 at the end of September or $110 at the end of June. This is without oil coming legally from Russian and OPEC lowering production. Side note. Oil company profits are off the charts as they continue to sell existing inventory at elevated prices while spending little or nothing to increase production.
The lumber futures market has prices of lumber down by 1/3 since June and off by 60% from the beginning of the year.
The yield of the 10-Year T-Bill increased to 4.1% on October 31 from 3.04% on June 30 and 1.52% at the beginning of 2022. This will eventually be good news for saving as banks eventually start to pay more for deposits but not good news for borrowers….home loans for 30-yr fixed are over 7% now and were around 3% or less a year ago.
Sorry, but I cannot help myself. Here it comes. Gold is NOT an inflation hedge. It is a commodity. The price changes based upon changes in supply and demand. With the last few years of rising…or streaking inflation, the price of gold has changed from $1,902/oz at the end of 2020, to $1,831 at the end of 2021 to $1,640 at the end of October 2022. So the price went down as inflation got worse…..hmmmmm. Not predicting the future…just saying.
So why is the stock market up? Because. Just because.
Truism #1: The stock market is a “leading economic indicator.” This means that the stock market begins to go up when investors and traders sense the economy is going to expand or grow in the future. Notice carefully, I did not say the stock market goes up “as the economy” improves. Or after the economy improves. The market goes up in anticipation of better economy “someday.”
Truism #2: The price at which stocks are bought and sold is merely a transaction. One buyer. One seller. I agree to pay the price you are asking for this stock on this day at this time for this specific number. It is just a number. What is that number based upon? Who decides what the number will be? The buyer and the seller decide. What influences their negotiation?
Truism #3: Sometime prices are based upon the “information” and sometimes it is gut feelings and emotions. The “information” includes statistics like sales, costs, and profits. What are the numbers? Are sales up? Costs down? Profits up?
Truism #4: Sometimes there is a dis-connect between the transactions and the information. If we look back just a few weeks (we all look smart when we look back), many, many companies were experiencing profits equal to or greater than a year ago. At the same time, the ‘transactions” meaning the prices of stocks are down from 10% to 30% during the last year.
Currently, company profits are just as good, better than, or not as bad as we thought they could be. Business is going ok to pretty well. Most people that want a job have one or can maybe even find a better job that pays more. This is all good news for the consumer….but it is also bad news for inflation.
Consumers with lots of money to spend has led to a surging economy coming out of COVID. Combine that with the difficulty of finding products has led to price changes which has brought us to the inflation of today.
The FED is increasing interest rates and will continue to increase rates to discourage borrowing and consumer spending. The yield of the 10-Year T-Bill increased to 4.1% on October 31 from 3.04% June 30 and 1.52% at the beginning of 2022. This will eventually be good news for savings as banks eventually start to pay more for deposits but not good news for borrowers….home loans for 30-yr fixed-rate mortgages are over 7% now and were around 3% or less a year ago. Raising rates will bring inflation down to the target 2 or 3%. In theory, this may cause the stock market to contract. But the market has surged in the last month. Why? Because the market is anticipating the end of high interest rates and the resulting economic surge.
But will the stock market continue to go up from here? Maybe. Or maybe not? We will not know for sure until we can look back to know what happened. The inflation issue needs to be solved. Growing prices 2 or 3% are healthy for the economy. Prices growing at 8 and 9% are very bad.
Be glad the markets were up in October. But not too excited. Take a deep breath. Try to relax. Plan your cash flow. Know where your spending money is coming from for the next few years. Manage that money by taking little risk with it. But also know that a portion of your investments needs to grow at 6 or 7% in order to offset the combined effects of inflation and taxes.
What should you do? The same thing you have always done (I hope). Plan your cash flow needs well in advance. Avoid selling investments in declining markets. In fact, buy, buy, buy when markets are low. Don’t try to “time” the market. As Peter Lynch said, “The key to making money in the stock market is to not get scared out of the market.” Stick to your financial plan. If your goals and priorities have not changed, then your investments probably should not change.
Wollman Wealth Designs, Inc is a financial services firm in Escondido, CA partnering with families, friends and clients in San Diego County and around the country. Please visit our website, call the office or send us an email with your comments or questions.
Troise, Damian and the Associated Press. "October has actually been good for stocks. The Dow is on track for its biggest monthly gain since 1987 (at least) and it’s not alone." Fortune, 31 Oct. 2022, https://fortune.com/2022/10/31/october-stock-market-dow-best-month-since-1987-sp-500-nasdaq/
Burrows, Dan. "In October, Stocks Soared. Is the Bear Market Dead?" Kiplinger, 1 Nov. 2022, https://www.kiplinger.com/investing/in-october-stocks-soared-is-the-bear-market-dead
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