We have previously written that the market is in a state of limbo. The downtrend of 2022 was broken earlier this year, but the market’s action since has not been characteristic of a strong or lasting advance. Large technology companies, buoyed by investor enthusiasm around artificial intelligence, have boosted the S&P 500’s returns, and the index is up 11.3% for the year through 9/27. But the equal weighted version of the S&P 500, over which these large tech companies have less influence and which is more indicative of the market as a whole, is up just 1.2% over the same time frame (all data from Morningstar). Thankfully, our process has generally kept client accounts tilted towards the right areas of the market, including tech companies benefitting from AI, and accounts have enjoyed solid gains to date. But, in our view, this limbo state is likely to continue.
As the market advanced steadily during the summer, and market participants grew more optimistic about an economic soft landing, i.e. no recession, our indicators did not change enough to alter our conclusions. Over the last 2 months, the market has grown more worried by persistently strong inflation and the potential for a recession. As of this writing, the S&P 500 has declined just over 7% from its July highs. This decline has caused investors to become far more negative on the market’s prospects, as measured by sentiment and positioning surveys. Just as we cautioned against become too complacent in the summer, we now advocate against becoming too negative. In fact, several key market indicators are suggesting a potential reversal higher in the near future and a positive 4th quarter.
Jeff Saut, a strategist with over 60 years of stock market experience says, “investors should strive to accumulate more of the most valuable commodity on Wall Street: patience”. We all have a bias for action and want a quick resolution to potential problems; unfortunately, the market doesn’t always give us what we want. The uniqueness and economic distortions of the last few years will continue to take time to play out. In our monthly market calls, we have made the analogy to WWII and the extended sideways market in the late 1940s. While we will monitor and tweak along the way, we will not take drastic action until clearer signals emerge. When the road is muddy and the windshield is foggy, keep a steady hand at the wheel. In the meantime, interest rates are such that it pays to wait, we own quality companies, and our process seeks to tilt accounts towards the strongest areas of the market.
