Economic uncertainty may have peaked in the first half of 2022, but it remains high. Stocks are likely to continue to feel the weight of Federal Reserve policy tightening, shrinking market liquidity and slower economic growth.
(Sourced: USA Today)
The U.S. economy and stock market struggled in the first half of 2022. Facing a multi-decade high in inflation, aggressive monetary policy tightening by the Federal Reserve, and the effects of the Russia/Ukraine war, the S&P 500® index was down 21.3% as of June 13th. Sharp, countertrend rallies may continue this year, but aggressive Fed policy, the turning of the liquidity tide, and slower economic growth likely will keep pressure on stocks. Beginning with the COVID-19 pandemic in March 2020, the U.S. economy and asset markets greatly benefited from the epic jolt of trillions of dollars' worth of liquidity doled out by the Federal Reserve and Congress. With that liquidity now drying up—the Fed began raising short-term interest rates in the first half of this year—many wonder whether a recession is likely. History's lessons about the impact of Fed rate-hike cycles suggest a recession is more likely than a soft landing. Although the S&P 500 index reached bear market territory (that is, a drop of 20% or more from a recent peak) in mid-June, many of its underlying stocks had been in bear markets for a while, as had the Nasdaq and Russell 2000 indexes. Short, sharp rallies within an underlying downward trend are typical of bear markets, so investors should be prepared for more volatility. Weakening earnings and profit-margin outlooks could prompt another leg down for the market.
(Sourced: MarketWatch)
In the meantime, this is not a market likely to reward excessive risk-taking, and I continue to emphasize the importance of diversification (across and within asset classes) as well as the power of periodic rebalancing (that is, trimming investments that have grown beyond your target allocation and buying more of investments that have become underrepresented). I also suggest that stock-picking-oriented investors focus more on factors—particularly quality-oriented factors—than on sectors or traditional style indexes. Given high inflation, rising short-term interest rates, and weakening growth outlooks, I believe stocks of companies reflecting certain factors will perform better in relative terms; these include strong free cash flow, healthy balance sheets (cash rich, low debt), positive earnings revisions, and low volatility. Lastly, when markets become more volatile and weakness takes over from strength, I always remind investors that panic is not an investing strategy.
What does this kind of market entails to us for the future of stock market and value of U.S Dollar, to be continued....
By: Sunny Wadhwani
September 3rd, 2022
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