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Values & Perceptions

Values & Perceptions

November 01, 2023

The stock market is always moving as investors adjust their portfolios to their perspective of the economy and their stock holdings. The result is the actual value of stocks is rarely held as prices fluctuate above and below the actual based on the current profitability of the company. The key to building wealth is achieving sustainable and consistent yearly gains for your accounts. In this Weekly Brief, we review the wild ride of the past couple of years, what we can learn from it, and most importantly, what longer trend has been in place.

During a recent conversation with a client, we discussed how stock prices fluctuate more by investor perceptions than actual financial data of the stock company or economy. During times of high optimism, stock prices will rally on generally good economic news, and some individual stocks will soar in price based on speculation of outsized profits by specific companies. Issues like war, rising inflation, and labor shortages roll off the backs of investors during times when investors are riding high in confidence. The soaring stock price is, of course, based on speculation of more profits, and selloffs begin when confidence wanes on the potential of meeting investors’ (sometimes unrealistic) expectations.

Despite the coronavirus worldwide news in early 2020, investor expectations and optimism rose from the previous strong growth years of 2017- 2019. The S&P 500 had a dramatic but short-lived selloff in early 2020 from February 18 to March 23 that reversed quickly into a rally that continued to the end of 2021. From January 2020 to the end of 2021, investors pushed the S&P 500 up 47.52% and NASDAQ a whopping 74.36%.

But the continued news of the viral spread, foreign governments shutting down their economies, supply chain disruptions, and rising energy prices eventually depleted all investor optimism. Investors turned pessimistic in January 2022. During times of pessimism, the least bad news sends the stock market into a tailspin. Once the pessimist takes over, there is no appeasing investors, and all news is bad news. The result was a sharp market selloff in 2022, with the S&P 500 dropping 19.44% and NASDAQ plunging 33.10%.

If you had ignored the emotional winds of the media and rode out all the ups and downs of the past three years, you would still have a decent return on your investment based on the major indices. Since January 1, 2020, through today, the S&P 500 has a cumulative gain of 29.05% and NASDAQ 42.33%.

Certainly, you are asking when market values are actually accurate. In reality, for very brief periods, prices are swinging from periods of optimism to pessimism and back.

However, during times of volatility that can include massive swings in value, there is a trend. It is this underlying trend that is most important to longer-term investors. Looking at the chart below of the S&P 500 and NASDAQ for the past ten years, there is a clear upward trend for both indices that, at most times, the actual daily trading value of the index was well above or below this trend line.

Based on the trend lines established by connecting the starting value on October 31, 2013, and the high reached on September 13, 2018, it would appear that today’s value of the S&P 500 is right at the value of this trend and NASDAQ is trading about 10% above the trendline. I established this trendline that is mostly within the ranges of the indices for the past ten years.

The most important aspect is the clear positive upward trend that has been in effect since November 2013. The pandemic created huge whipsaw volatility, but the definable positive trend is still in tack for both the S&P 500 and NASDAQ for the past ten years.

What Does It Mean To Me?

We maintain our favorable view of the US stock market and economy. In the first half of 2023, the indices had a strong recovery from last year’s selloff. However, since July 31, investors have been selling, bringing down the S&P 500 by 58% for a YTD return through yesterday of 8.69% from its peak of 19.5%. NASDAQ and the tech sector are holding up much better, having declined 41% since its July 31 peak with a YTD return of 22.08% from its peak of 36.8%.

Both indices dropped below their 200 Day Moving Average earlier this month. Economic reports on consumer confidence, retail spending, and inflation continue to be positive. This Wednesday, Jerome Powell announces the decision by the Federal Open Market Committee (FOMC) on possible changes to the discount rate. Analysts predict a 90% probability that the Federal Reserve will hold rates for the second consecutive session.

We remain optimistic market conditions will remain stable with a positive trend continuing into 2024.

This is an excellent time of year for the final evaluation of your investments and financial plan. We welcome the opportunity to assist you and your family with this planning. Give us a call or send an email to schedule a complimentary financial planning meeting.