Market Update for September 12, 2023
The S&P 500 is now essentially flat for the last 2-months…and honestly, this is a sign of a healthy market. Healthy markets ebb and flow and work their way up over time. Unhealthy markets zig and zag and show a great deal more volatility day-to-day. Healthy markets tend to make money in a certain period and then “consolidate the gains,” to borrow a common phrase, which is to say the chart looks roughly flat for a period after the uptick. Sure, we would all love to make money every period or to know we can make, say, 1% per month consistently, but markets do not work like that. As I like to say, the stock market often feels expensive and scary, or cheap and going nowhere. Right now, we seem to be in a comfortable middle-ground, but I need only go back to early October 2022 - where we were revisiting and even briefly breaking the June 2022 lows - to get back to a harrowing time where the market seemed cheap/oversold, but my goodness was it going nowhere positively.
On a technical basis the S&P 500 seems to have established a base in the 4,180 range - this is a level I would not want to see the market breach to the downside in the coming months. Let’s call the upside target the all-time high, which is 4,796 on a closing basis, achieved January 3, 2022. As I am writing this note at level 4,486, we are about 7% above the level at which I would be concerned, and 7% below these all-time highs. The average amount of time it would take to get back to those highs is around 2.5 years, based on work presented by Dr. Claus te Wildt at our October 2022 National Conference, and this assumes we do not enter a recession. It is anyone’s guess if a recession still looms, but I can confidently say that we are not in a recession today - the data does not support the notion.
The Federal Reserve’s long-term inclination is to reduce the overnight lending rate from today’s level, as we are a nation that runs a massive deficit and constantly borrows money from others. It will need continued reductions in inflation and a softer economy to justify rate cuts, however. Three years ago, CD’s paid around 0.5%, inflation was under 2% and the 30-year mortgage rate was about 3%. Now, CD’s pay north of 5%, inflation is in the 4.5% range and the 30-year mortgage is north of 7%. If the Fed could pick its perfect numbers, I believe it would want a world where CD’s pay about 3%, inflation is positive but no higher than 2% (they’ve stated this is the maximum level they’re comfortable with, on many occasions), and the 30-year mortgage sits around 5%. They will likely continue to massage things both publicly and privately until we are close to those numbers.