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

Popular posts from this blog

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...

Sound Advice: March 10, 2021

The ABCs of Stock Picking After decades of analyzing stocks (and funds) and investing for clients, I'm happy to share in plain English what's involved, what works, and what doesn't.  Keep in mind the reality that successful stock picking is an effort to maintain a good batting average. In baseball, a batting average of .300 or better is considered quite good.  With stock picking, you need to do better than .600, which means you have many more winners than losers. No one gets it right all of the time.  It's not even close.  Wall Street shops all have their recommended lists and the financial media regularly hawk 10 stocks to buy now. Following that road usually is a direct route to disaster.  Don't be tempted. Let's begin with the big picture: The stock market goes up and down over time, but the long-term trend is up.  When there's a rally under way, everyone feels like a genius.  When the market hits an air pocket, though, with few exception...

Sound Advice: June 17, 2020

Rock and a Hard Place Regardless of your age, impressions from childhood linger.  As the first days of summer approach, we all remember the feeling that accompanied the end of a school year.  Yet as much as many of us would like to believe we again have the summertime freedom to do as we wish, the reality is quite the opposite. Although months of confinement and limitations on social interaction have increased our personal discomfort and severely impacted the business community, our current situation is not analogous to the end of any school year.  It’s quite the opposite. There is every reason to continue wearing face masks, social distancing, and avoiding close contact with others.  Nothing suggests that we can modify our behavior significantly or resume patterns of daily living we enjoyed only a few months ago. There are no meaningful advances in medical treatments.  At best, there are attempts to combine different approaches...