Weekly eLetter 2/24/2023 – Cautious Optimism
There is no such thing as the perfect market indicator or model. Timing models are designed to participate in bull markets and limit the drawdowns during bear markets. Both the heavily used Composite Breadth Model and S&P 1500 Thrust Model do the job with decent returns and limited drawdowns.
As with the stock market, models will suffer when trends fail to take hold. Broad market timing is important because the state of the stock market is the single biggest influence on stocks and stock-based ETFs. The odds are in our favor during bull markets and stacked against us during bear markets. There are also periods of whipsaw when nothing seems to work on a consistent basis, such as now. Even so, we continue to need and use a model or indicator(s) to tell us the state of the stock market. There will be extended bull markets and extended uptrends again. For now, however, we must endure the whipsaws. And so, here we go again. Just when we thought positive economic news was a good thing — as decently strong data support the better proposition of a soft-ish landing – traders have whiplashed markets. Again. On Tuesday of this week the news that the S&P Global’s Flash Services came in better than expected. Actually, it was MUCH better than the expected number of 47.1. Indeed, it was MUCH higher than January’s 46.8, and the highest reading in the past 8 months. (Note- numbers greater than 50 signal expansion). All are good, right? And yet Tuesday’s S&P Index* drop gave us the worst day of 2023…so far. This on top of the Philly Fed Services Index which surprised to the upside and broke to the positive side of the ledger. AND we had January’s SUPER Jobs report, stunning job creations, and a declining unemployment rate which prompted the St. Louis Fed President Bullard to admit that the economy was ‘stronger than we thought.’ He continued ‘we have a good shot at beating inflation in 2023… without a recession.’
To me (or to MOST logical people I think) this seems like decent, or even good news. Soft landings, recession avoidance. And, it goes without saying that good economic data supports corporate earnings. So, with the odds of recession apparently falling, I would surmise that investors could be looking for optimism, positive reports, and generally better markets.
I’ve heard that the bit of a January bump was supposedly showing that good effect — with expectations of a stronger economy and inflation falling. Also, I get that the pop in stock process in January was also accompanied by a major disconnect of bond yields- both stocks and bonds rose in January. Confusing, yes. It appears that both stocks and bonds were discounting the improved economy. But then when you add in the recent much hotter (than expected) inflation numbers, the bond traders needed to make some adjustments. Now here’s the key. Does the bond market reset (now an expectation of 2 or 3 rate hikes) change anything? The Fed has been clear (as they can be) that they are and will continue to be dependent on the data. And so, if inflation comes down over time- as is still the expectation, what’s giving the bears their strength? And so? I see a market that was somewhat overbought, and a rally that perhaps had gotten ahead of itself. Add to that the hot CPI numbers and SOME SORT of pullback was certainly possible. We all know this. And after a decent move to the upside, it’s pretty common for buyers to just sit. Relax. Sit on their hands. Pause. Which gives the bears time to respond- which they most certainly have this morning. Then when technical support gives way during the barrage of selling and there are some widely followed moving averages just below (the 50- and 200-day for example) a “whoosh” lower can occur to “test” those important levels. Check. This is normal behavior. So, from my seat, the test is “on.” The test of support. Of the moving averages. And of the bulls resolve. Is it time for investors look ahead to those better days when the Fed will step aside? Or is it time for the doom and gloom that some prognosticators suggest is sure to follow? THIS is where things get interesting. THIS is where investors must pick a side and/or take a stand. And THIS is likely where possession of the ball gets determined. Is this the start of a new cyclical bull market? Or just another in a string of bear market rallies? We shall see. As always, I am as a rules-guided investor. And for now, I’m in the cautiously optimistic camp.
Ron’s Market Minute – Is This the Time for a New Home?
Sometimes it is difficult to determine what is ‘normal’. A case in point being: Normally there are always at least a handful of clients who are asking ‘Is this a good time to buy a house?’
We’ve come to expect, over the years, that even the clients who had found their ‘perfect home’ and were sure they were permanently settled, somehow managed to find yet a more perfect home. Recently, however, it seems that there are many more clients asking that same question- Is this the time to buy a new home? They cite logical reasons such as the blow-off rise in housing prices seems to have levelled off, and mortgage rates are pulling back, if only a bit. So, in the interest of providing some insight to the issue, I’m including a graph that I ran across this past week. It’s from the National Association of Realtors and will give an opinion on that question. Have a look here:
The graph shows that home prices have advanced at about the same level as inflation- with two significant exceptions. Let’s admit that this graph covers a limited amount of time, and we have had WAY too few cases of a real estate boom/bust cycle – at least in the recent past. Still, for those hoping that the recent pullback in housing prices MAY be over because of the recent pullback in mortgage rates, it’s worth noting that during the unwinding of the 2005 Housing Bubble, mortgage rates peaked long before home prices hit bottom (See the red dot on the graph). So, while a small reprieve in mortgage rates CAN result in a short-term increase in prices and activity, a much deeper correction in housing prices MAY still be ahead of us. The fact that housing prices have gotten to be VERY stretched vs. the consumer Price Index, does not guarantee that the housing market will return to match CPI charts. On the other hand, given that housing is a major component of the economy (and a consumer’s perception of wealth), better prices for home buyers MAY be ahead of us. It is unknowable, yet it is an interesting view.
Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite D406A
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com
LFS-5482584-022423
*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.
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