If you have a conversation with anyone who is certain about the direction the stock market is going, please take the advice with caution, because these are most certainly uncertain times. A lot of it depends on the source, but please remember that fear gets clicks, and optimism sounds too good to be true. The truth lies somewhere in the middle.
This provides a challenge for investors as they navigate this unknown environment. For the last decade, Information Technology was the best performer in the stock market, while Energy was the lowest performing sector. In 2022, the roles flipped, and Energy was the best performing sector while Information Technology was the worst. Then to start 2023, Technology came screaming back and Energy took a backseat. We can construct stories for why these things happen after the fact, but it is nearly impossible to predict them early enough to always be on the winning end.
This is why active management and diversification are so powerful for long-term investors. Markets change, but they also have trends, so it is possible to achieve some wins while limiting losses. The trend dictating our markets for the last year has been interest rates.
Since March of 2022, the Federal Reserve has been raising interest rates to combat the rapid rise of inflation. The Fed’s initial thought was inflation was going to be temporary. After it became apparent this was not a transitory event, the Fed made a pivot and expressed a need to raise interest rates to temper the inflation run-up. The general consensus now is that the Fed is approaching the end of rate-hikes, and may even be ready to pause. Many thought they would have paused earlier after the Silicon Valley Bank collapse that was caused, in part, by the rapid rate-hikes. However, many economists believe the Fed could continue to raise rates further to make sure inflation numbers continue to lower to the targeted 2% year-over-year goal.
The Fed recently shared the 2023 and 2024 estimated rate projections made by the 18 members of the Federal Reserve board. The 2023 forecast ranges from 4.875% – 5.875%, with most members leaning towards 5.125% as the final rate by the end of the year. However, the forecast for 2024 ranges from 3.375% – 5.625%. The 18 people who make this decision are telegraphing to the market that there is no obvious direction forward.
This uncertainty could lead to varying market outcomes. If the Fed pauses or pivots to lowering interest rates, a good chance exists that the stock market will respond with a big run-up. But if the Fed continues to raise rates, the stock market could continue to remain flat, or worse, drop, and money will continue to flow into “risk-free” U.S. Treasuries or money market accounts and CDs.
We feel, now more than ever, that all signs point to a well-diversified investment portfolio as the best strategy to manage the unknowns of where our market and economy are heading.
Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.