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WIA BELIEVES | Goldilocks Now, but is there a Bear in the story?

WIA BELIEVES | Goldilocks Now, but is there a Bear in the story?

| May 22, 2024

Short-Term vs. Long-Term Outlook:

The S&P 500 hit a new all-time high last week, eclipsing the levels seen in late March, yet over that time period, the following occurred:

  • The first Fed rate cut is now expected in September, not June (as it was projected to be in late March).
  • The Fed is only expected to cut once or twice, not three or four times (as it was in late March).
  • The ISM PMIs (industrial production expectations) both printed below 50, the first time that’s occurred since December 2022.
  • The unemployment rate rose to 3.9%, tying the highest level in months.
  • The CPI is rose at 3.4% year-over-year, up from 3.15% in February, and well above the Fed’s 2% threshold.
  • Earnings expectations for 2023 remain in the $240-$245 range, unchanged from recent projections.

Put simply, none of these fundamental factors are better than they were in March. So, why are stocks higher today than they were in late March?

Sentiment and inertia. Investors have convinced themselves that we are in the midst of a near-stock-perfect Goldilocks environment that’s still characterized by 1) Stable growth, 2) Falling inflation, 3) Fed rate cuts, and 4) AI enthusiasm. Yes, all four of those aspects of this market are worse today than they were in March. But they’re not “worse enough” to force investors to think they aren’t happening. Put differently, the environment may not be as good as in late March, but it’s still good enough to push stocks higher. I believe that belief continues to make this market vulnerable to any negative news that might make investors confront a macroeconomic reality that isn’t as good as hoped.

What Does This Mean for Markets?

It means that, for now, the trend is higher, and those investors highly committed to riding the equity wave are feeling good, but are vulnerable. In contrast, I believe those who maintain a modest degree of long-risk exposure (still owning some stocks, bonds, etc.) but continue to manage volatility are prudent. This is how we have our Webster Investment Advisors clients invested; for moderate, balanced returns. I think the statistics back this up, as utilities have been the best-performing sector in the S&P 500 over the past three months, rising 21%.  Meanwhile the previously high-flying consumer staples sector has gained just 7%. More broadly, value has gained 8% vs. 5% for growth. I think that this outperformance of previously undervalued stock sectors can continue and will provide a cushion of sorts should the broader markets recoil.

Goldilocks is here for now, and that’s a good thing. But it’s also drawing closer to the ultimate resolution of the Fed’s hiking cycle. While we enjoy a supportive stock/bond environment right now, don’t confuse that with a setup that can’t get more volatile in the coming months.

Because of that, we will continue to advocate for diversified positioning via undervalued sectors, inflation-sensitive hard assets, international equities, and tactical managers who can adjust quickly to shifting markets. This hybrid approach allows investors to be defensive yet opportunistic. If we get a slow growth or higher inflation scare, those sectors will likely outperform. Meanwhile, if inflation and growth drift in a Goldilocks manner, they’ll still rally along with the broader market.

The bottom line is that markets are in a sweet spot right now as growth is slowing but positive, and disinflation has slowed but not stalled. However, I’ve never seen that dynamic last for long in my four-plus decade career, and as always, my focus is on what’s next, and the facts are clear: The outlook for “what’s next” on growth isn’t terrible, but it’s also not great. That doesn’t mean a slowdown is coming, but it does mean we can’t afford to ignore that possibility.

Please let us know if you would like to discuss this further.


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