I hope everyone is having a great day. In this report I am going to share an update on the US stock market (S&P 500) and what I’m expecting in the next few months.
After struggling for most of the year, US stocks delivered a solid relief rally in late summer. In late July and early August the S&P 500 cut its 2022 loss from 24% to 9%. Investors were optimistic the bottom was in. However after that 4-week rally, US stocks buckled and fell lower in September. After a pretty rough September, the S&P 500 is down 22% on the year, hitting a new 52-week low in the meantime. Take a look at the 2022 chart below.
*charts from tradingview.com
Stocks were weak for reasons that we all know about.
- High inflation is hurting consumer spending.
- Interest rates are surging, stifling economic growth.
- Global military conflict causing uncertainty.
With high inflation and a weak market, its no shocker that consumer and investors are nervous about the future. Looking forward, markets and stocks in particular will have their challenges. I expect volatility to remain elevated for the next few months. However there is also reason for optimism.
3 Reasons to Be Optimistic About Stocks
S&P 500 is oversold: In the short run, I see a high probability that the S&P 500 will rebound. After the losses in September, many technical indicators are pointing to a relief rally close at hand. For example, the relative strength indicator (RSI), a technical indicator that measures when stocks are oversold or overbought, just hit its second most “oversold” reading of the year. This is a strong signal that after a month of losses, the S&P 500 should see a rebound.
Inflation as a catalyst: So far inflation has remained stubbornly high despite the Feds best efforts. But looking forward, we should continue to see the effects of higher interest rates and higher mortgage rates work their way deeper into the economy. That has the potential to curb inflation growth. And if we see any tick lower on inflation it should be a strong catalyst for stocks.
Interest rates as a catalyst: The Fed is taking the painful measure of raising interest rates right now. But the good news is that most of the heavy lifting is over. I am expecting a few more interest rate hikes in the next six months, but after that I expect the Fed to moderate and that would be another catalyst for stocks.
Seasonal strength for stocks: US stocks are about to enter their best 6-month cycle of the year, which happens from October to April. Take a look at the chart below that shows this seasonal trend.
Here is the Plan Moving Forward
At the highest level, focus on the long run. The last year has been pretty tough for investors but bear markets have always given birth to new bull markets.
History also proves that buying when stocks are down is usually a great time to invest.
Clients who are fully invested, the plan is to sit tight and look for a rebound in stocks. For clients with cash, I will be looking to deploy some of that cash at these lower levels, also looking for a rebound in stocks.
For my own personal investment accounts, I will continue to make monthly contributions and focus on long-term growth. Have a great day, I’ll be back next week with another update.
Disclaimer: This report is for entertainment purposes only. Every investor should consult with an investment advisor before making investment decisions. The Vodicka Group, Inc. is not a broker/dealer. We do not receive compensation for mentioning stocks. At various times, the clients, publishers and employees of Vodicka Group, Inc., may buy or sell the securities discussed for purposes of investment or trading.
