Skip to main content

Sound Advice: August 17, 2022

Recession . . . and then what? 

The prospect of a recession and the repercussions that come along with an economic downturn are unsettling to investors, but by the time there has been a reasonable level of agreement about such an occurrence, most, if not all, of the typical pullback in stocks has already taken place.

 

Although periods of economic weakness are different and brought about by varying, often unique, developments, the result tends to be similar.  The stage is set when the stock market has reached excessively rich levels.  Even so, that alone rarely starts the drop.

 

The trigger is usually an event or series of events that raises the level of uncertainty among Wall Streeters . . . as well as the public . . . and begins a chain of fear-induced selling.

 

Over time, stock market valuations tend to be either too high or too low.  They are rarely near the average of past valuations, which ranged between 15-18 times estimated earnings for the then-current 12-month period.

 

When corporate earnings are accelerating, valuations widen.  And vice-versa.  Investors tend to make their buying and selling decisions based on what they see as future prospects.  That’s what the analysis of stocks is all about.

 

For companies growing steadily, the task of determining a normal range of prices and values is manageable.  For cyclical companies such as those in the construction industry, it’s more difficult.  And then there are those undergoing major changes, perhaps new management or a marked detour in their products or services.  Often, these are companies that have been in a rut, hoping big changes will bring big improvement.

 

These are referred to as turnaround situations.  The stories usually sound promising, but most of them prove to be disappointing.

 

That perspective is helpful is getting a handle on the current economic situation.  Here, too, we have a prospective turnaround.  But for the economy, unlike individual companies, recovery is virtually guaranteed.  What is unknown is the timing.

 

Most stocks are still down from the start of this year and further interest rate hikes by the Fed are likely through yearend and into 2023.  Employment data continues to appear promising, though some easing in this area seems likely.  Inflation is high, but as supply constraints ease further prices may well start heading lower.

 

With all of this said, prospects for the market averages are continuing to improve.  It would not be at all surprising to see increasing strength through yearend and beyond.

 

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883

 

203-222-9370

www.soundasset.com

www.soundasset.blogspot.com

Any questions?  Please contact me at nrwayne@soundasset.com

Comments

Post a Comment

Popular posts from this blog

Sound Advice: September 21, 2022

The Professional Approach To Stock Selection There are various approaches to stock selection, but the two that predominate are fundamental analysis and technical analysis.  Fundamental analysis is a numbers-based method that evaluates key factors such as income and financial health, including the past, present, and future.  Technical analysis emphasizes movements and formations of stock prices. Fundamental analysis is based on factors that over time have proved to have a meaningful impact on stock price movements.  The optimal picture of corporate profitability is steady growth, both in the past and, prospectively, in the coming years.  Steady growth is rewarded by higher valuations of underlying earning power than those accorded companies with erratic progress. When professionals screen (filter) the data of the broad universe of stocks, they look for companies that move ahead every year, regardless of the prevailing economic conditions.  Although high pas...
Post a Comment
Read more

Sound Advice: July 26, 2023

Is Day Trading a Good Idea? Day trading can be both exciting and potentially profitable, but it also comes with significant risks and challenges. Whether it's a good idea depends on several factors, including your financial situation, risk tolerance, time commitment, and knowledge of the markets. Here are some considerations to keep in mind: Risk and volatility: Day trading involves buying and selling securities within a short time frame, often within the same day. This exposes you to the inherent volatility and risks of the market. Prices can fluctuate rapidly, and unexpected events can have a significant impact on stock prices, making it challenging to consistently make profits. Time commitment: Day trading requires a substantial time commitment. It involves closely monitoring market movements, conducting research, and executing trades. It can be stressful and demanding, as you need to be actively engaged in the market during t...
Post a Comment
Read more

Sound Advice: May 31, 2023

High Yields, Yes!  But There Are Risks Now that failure to get much done in Washington seems to be the bottom line for lots of talk, but little action, it’s hard not to wonder whether we’re missing something.  Yes, the Federal Reserve Board has aggressively raised interest rates in the hope of putting a damper on excessively high inflation, but one would think that there might be some good news as a result of these efforts. The hoped-for result is that inflation is indeed moderating.  Also of importance, though, is the sharp improvement in interest rates on fixed-income investments, usually a.k.a. bonds.  For much of the past decade or more, interest rates have languished at or near historical lows, which created considerable shortfalls for folks living on fixed incomes. Thanks to the Fed’s hikes, the returns on bonds and the like are beginning to be of interest.  But . . . and that’s a big but . . . there are risks involved. For short-term investing at ...
Post a Comment
Read more