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Sound Advice: November 1, 2023

Are Stocks on Sale?

If history provides meaningful clues to help answer this question, the answer is probably yes.  Why?  For several reasons.

Although some folks will disagree, the reality is that the nation’s economy is in reasonably good shape.  Yes, there certainly was a period during the pandemic when inflation soared to the low double digits, but that time has passed.  The latest numbers suggest that the current inflation rate is between 3.5% and 4.0%, a range that would not be described as astronomical.

For a time, gasoline prices took off, but they’ve eased from above $5 a gallon to less than $4 a gallon in most places.  However one views the situation, the periodic gains in the cost of living are moving in the right direction.

So what’s the problem?  It’s interest rates, which the Federal Reserve has increased at an extraordinarily rapid pace to get inflation under control.  Judging by recent comments by the Central Bank, it appears that we are approaching a peak level, which may well be followed by an easing.

That, however, is not an immediate prospect, but the stock market tends to look ahead and respond accordingly.  When rates rise, market prices are usually weak.  When rates fall, market prices strength.

Even so, we are still dealing with serious geopolitical issues that more than muddy the waters.  The war in Ukraine is now moving through the latter part of Year Two.   Add the distressing developments in Israel and there’s plenty of bad news to rattle investors, which is why the impact of improving U.S. business prospects may be more than offset by troubled investor psychology.

In the short term, changes in investor psychology always have a more important influence on the stock market than the progress of individual companies or the economy as a whole.  But, both can cause wide swings in short periods of time.

Another thing to keep in mind is the seasonal pattern of the stock market.  Since 1950, more than two-thirds of annual gains have taken place during the first and fourth calendar quarters of the year.  There’s no guarantee that near-term results will continue that pattern, but in the wake of a weak September quarter it would come as no surprise if stocks started to regain upward momentum.

N. Russell Wayne, CFP

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

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