With the jobs numbers strong and the Fed increasing interest rates .25% on Fed Funds rate, we enter a time with lots of questions. What the Fed does next is important to what the markets will do over the next three months. My assessment is that a defensive approach for now is wise and that mid-year we will begin a long-term bull market. Allow me to pose three scenarios.
Scenario 1
U.S. enters recession What works
Fed cuts rates Long duration bonds Equities fall High quality bonds
Long Term Bond rates fall Value Stocks (Bond values rise) Hedged Equity
Scenario 2
No/mild U.S. Recession What works
Jobs numbers stay strong Short duration bonds
Inflation stays high 2% - 4% Cash Fed pauses, keeps rates high Value stocks
New normal Active management outperforms
Scenario 3
No U.S. Recession What works
Jobs numbers stay strong Short duration bonds
Inflation stays high 3% -5% Cash
Fed Keeps raising rates Value stocks/ small cap stocks
Active management outperforms
My assessment comes between scenarios 2 and 3 for the next three months. The bond market is telling us I am correct. The stock market is pricing in Scenario 1. That is why things appear confusing. I think a defensive approach is necessary for a time. If the Nasdaq drops 10% we will quickly make a shift to large cap growth. If I am correct about the Fed over the next three months and they continue to raise rates, then we will move mid-summer.
Earnings continue to be strong as does the jobs numbers. We still need to see if inflation is slowing receding. I will continue to share with the numbers and the resultant affect on the markets. For now we will stay the course.
I know all of this is confusing to all of you. What is certain is the market is poised for a long term upturn. We just don’t know when that will start. Until then we stay defensive.
According to FactSet Research, we have seen 85 percent of the S&P 500 component companies report their results for the first quarter of 2023. Of the 85 percent that have reported, 79 percent have reported earnings that beat expectations, while 21 percent met or missed expectations. When looking at revenues, 75 percent of companies that have reported have beaten expectations while 25 percent have fallen short. The 75 percent of companies beating revenue expectations is above the average rate of the last 1, 3 and 5 years and is a very positive sign for the overall health of corporate America.
"This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results. Investors should always consult their financial advisor before acting on any information contained in this newsletter. The information provided is for illustrative purposes only. The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc."