Skip to main content

Sound Advice: October 19, 2022

Dead Cat Bounce?

One of the most common occurrences during times of market weakness is what’s known as a dead cat bounce.  A dead cat bounce is a short-term, often only one day, rally of considerable proportion.  These days, that kind of jump would probably be in the range of at least 500 to 1000 points in the Dow Jones Industrial Average.  It would be tempting to think that these interim rebounds are indicative of more to come, but almost always they are nothing more than temporary relief from a lengthy plunge in the leading indexes.

It would be naïve to think that they signal a continuing change in the direction of the market.

Current economic prospects are not encouraging.  The Fed has already increased the federal funds rate from essentially zero to 3.25%, thanks to a trio of 0.75% jumps, and indications are that there is more to come.  Indeed, one might well expect to see this key indicator near 4.50% before the program of tightening ends next year.  This is the Fed’s primary tool in dampening the economy and getting rampant inflation under control.

Although the central bank’s goal is a soft landing in which business slows temporarily, the history of these efforts suggests that economic conditions will get much worse and extend, perhaps intensify, the recession that has been under way so far this year.  To date, the labor market remains strong, though one has to wonder how this strength may persist when overall conditions finally react to the Fed’s credit crunch.

However severe the impact of higher interest rates, they will eventually flatten and then ease.  By that time, yields on fixed-income investments will be of more interest and subsequent easing will provide the potential for principal appreciation as well as current income.

We are not there yet and may not be for a number of months.  As before, the investment markets look ahead, sometimes far ahead.  In the past, the September-October time frame has often been a period when weak markets changed direction.  We could be seeing that now, but it would be best to tiptoe in to take advantage of lower prices and add in increments over the next few quarters. 

N. Russell Wayne, CFPÒ

www.soundasset.com

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

Sound Asset Management Inc.

Weston, CT  06883

 203-222-9370

Comments

Popular posts from this blog

Sound Advice: March 16, 2022

Pullback . . . and then what?   The one certainty about the stock market is well illustrated by an account of a 1955 story about J. Pierpont Morgan given by the U.S. Secretary of the Treasury George M. Humphrey. The story is as follows: Somebody said: ‘Mr. Morgan, you are familiar with the stock market.?’ He said: ‘Yes.’ They said: ‘You know quite a lot about it?’   And he said: ‘Yes, I do.’ They said: ‘Do you think you can tell us what the stock market will do?’   He said: ‘Yes, I can.’   They said: ‘That is very interesting.   Will you please do so?’   He said: ‘Yes. It will fluctuate.’ Equally on point is a quotation from Benjamin Graham, widely known as the father of value investing and co-author with David Dodd of the recognized text on Security Analysis: “Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble . . . to give way to hop

Sound Advice: December 1, 2021

Delta, Mu, Omicron, etc. Only eight months ago, I wrote about the regularity of market drops and what always follows.   Over the last 40 years, the Standard & Poor’s 500 Index has had average annual interim drops of 14.3%.   More than half of those pullbacks were greater than 10%, but a full recovery and even higher prices came after the dips every time. Given the stretched valuations that have prevailed for an extended period, the question was never whether there would be a pullback, but what would set it off.   Stretched valuations alone don’t start selloffs and they often persist far longer than one would expect.   In the past, however, the trigger for market hiccups has typically been unusual geopolitical events. Concern about the pace of economic progress is another trigger, as is what lies ahead for interest rates.   Yet, much of the recent news about business has been encouraging and prospective increases in interest rates will probably be gradual.   Although there ar

Sound Advice: December 29, 2021

“Hope smiles from the threshold of the year to come, whispering, ‘It will be happier.’”                                                         ALFRED LORD TENNYSON           N. Russell Wayne, CFP ®