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  • Writer's pictureKyle Rolek, Retirement Planning Specialist

With All The Bad News So Far This Year, Why are Markets Positive?




There’s still a very long way to go in 2023 and many risks on the horizon, but markets are off to a good start so far in 2023.


Year-to-date performance highlights as of the end of Q1 2023:
  • The S&P 500 Index is positive by about +7% so far this year

  • The Nasdaq Index is positive by about +17% so far this year

  • International stock, while also positive year to date, continues its long stretch of underperformance vs. US stock. The “emerging market” index is positive by about 2% so far this year (based on VWO), and the developed markets index is positive by about 6% so far this year (based on VXUS).

In spite of all the bad news headlines this year about bank failures, continued inflation, and continued war, why are markets positive?


The most direct answer is that there’s more overall demand to buy stock versus demand to sell stock currently.


While there are many factors that impact demand to buy vs. demand to sell at any given time, here are three potential drivers year-to-date:


1 - Wide-spread Pessimism Coming Into 2023

There was very wide-spread pessimism heading into 2023. Wide-spread pessimism reduces market values. One of Warren Buffett’s most famous quotes is “be fearful when others are greedy, and be greedy when others are fearful.”


Exuberance pushes market values higher, which generally increases risk.


Fear pushes market values lower, which generally decreases risk.


Sentiment was very pessimistic heading into 2023, which often sets up nicely for investment returns looking ahead once things eventually turn around.


It’s very difficult to time a bottom, but investors who have either bought more or stayed the course following very bad years, like the -20% the S&P 500 experienced in 2022, have done quite well over the long-term.


When expectations are high - Things need to go near perfectly to meet or exceed high expectations or market values will fall.


When expectations are low - Even a subtle hint that things are bad, but not bad as expected, can be enough to push market values higher.


2 - Inflation Showing Signs of Slowing

The chart below shows the annual reported rate of inflation at the end of each month over the last 10 years as measured by the CPI (Consumer Price Index).


Although the 6% annual inflation rate reported for February 2023 is still very high by historical standards, it’s trending downward.


As shown below, the inflation rate has been declining for the last 8 months.


Who knows where inflation will head over the next 8 months, there’s still plenty of uncertainty, but even the chance that this trend continues has been enough to push stock market values higher year-to-date due to the very high degree of pessimism coming into the year as stated above.



3 – Less Aggressive Federal Reserve Interest Rate Increases

A key driver of the stock and bond market decline in 2022 was the Federal Reserve aggressively raising interest rates to make up for past mistakes when they predicted inflation would be “transitory”, which caused them to keep interest rates too low for too long. This is part of what caused the inflation we’re experiencing now.


Just as you experienced losses in your investments as a result of all this in 2022, many banks lost money too. This has increased risks to financial stability as we’ve seen with the failure of Silicon Valley Bank (the government has promised to make all depositors whole).


Prior to the failure of Silicon Valley Bank, the Federal Reserve repeatedly stated they would continue to raise interest rates until the economy was harmed enough for companies to accelerate layoffs. If enough people lost their jobs, they said, inflation would slow. Clearly, this could cause harm in many ways.


However, the failure of Silicon Valley Bank has now caused the Federal Reserve to publicly shift their tone to some extent. At least for now, they’ve acknowledged that aggressive interest rate hikes have many negative consequences, and they need to be mindful of all the consequences of their interest rate hikes instead of solely focusing on inflation.


The potential for less aggressive interest rate hikes, or at least less risk of interest rates reaching double digit percentages not seen since the 1980s, has been another positive catalyst for markets so far this year.


Summary:

There’s still a very long way to go in 2023 and many risks on the horizon, but markets are off to a good start so far in 2023.


If you’re wondering why, the three reasons stated above are at least part of the reason why the demand to buy has exceeded the demand to sell and market values have increased, at least so far this year.



Want To Discuss This Individually?


1 - For clients: Call or email me any time as always.


2 - For non-clients: Complete the form on the website to request a retirement planning consultation: www.rolekretirement.com



This is article is for informational purposes only and should not be considered as tax or legal advice. Advice is only provided after entering into an Advisory Agreement with the Advisor. See other disclosure here: Disclosures

187 views1 comment

1 Comment


dmonyer
Apr 04, 2023

Kyle, We really appreciate articles like this that give a short, but informative look at what is going on!


Dave & Sandy M.

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Article Disclosures

 

Informational Purposes

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

 

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The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

 

Information Obtained from a Third Party Source

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Illustrative Purposes​

The information contained is for illustrative purposes only.

Target Assumptions

Any target assumptions described in the articles are estimates based on certain assumptions and analysis made by the advisor. There is no guarantee that the estimates will be achieved.

 

If you have any questions regarding our disclosures, please contact us at 267-427-5667 or kyle.rolek@rolekretirement.com

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