LPWMG

The complexion of the market is shifting in the short term, from a strong bull, to a bucking bull, or potentially an angry bear, either way we are prepared.

In our last update we discussed the economy and the market’s ability to overcome issues. We believe the risks are now higher as the stock market valuation is higher, bond yields have moved to concerning levels for stock valuations, and geopolitical issues may push inflation higher.

In the near term, oil prices could become an issue for the stock market as it will likely push inflation higher. We would expect the Israelis to respond against Iran, potentially targeting Iran’s oil fields, nuclear sites, or military installations. Our guess is this is far from over. It needs to be a response to deter Iran from future attacks. We think this puts a short-term cloud over the market.

The U.S. Economy had two negative quarters of GDP growth in 2022 and a bear market with the S&P 500 falling -25% from high to low, followed by a major recovery in 2023 and through the first quarter of 2024. We believe the market has its challenges in 2024. Being an election year, the markets are generally positive, but with higher volatility. In an election year, about 25% of the time a Black Swan (a very significant economic surprise) event occurs and impacts the markets. Historically, the year after the election is generally when a recession occurs.

We were pleased that we have seen a strong rotation in the markets so that more than a few mega-cap technology stocks were performing. The market performance has now been much broader based. Now the rest of the market has performed, the risk of a significant decline is elevated. The issue of inflation is not cooperating. Inflation has pushed the 10-Year Treasury note up to 4.63%, which makes the stock market P/E of around 21 times earnings very expensive or an earnings yield of 4.7%. The 3-month annualized CPI rate has rebounded to a 10-month high of 4.5%. The current rate of inflation is about the same rate as the 10-Year. Unless inflation moderates, bond yields will move higher. As a result, the market will be very dependent on earnings growth to offset the high valuations of the stock market. We think we are entering a highly volatile period for the market with significant risk.

As we have previously discussed, the stock market had expected a much faster decline in inflation than was the reality. The market is adjusting to higher inflation, with higher bond yields, and perhaps fewer to no rate cuts. The market needs to deal with a P/E multiple (valuations) that have likely peaked, and what higher rates for longer means to earnings for this year and next year. With inflation remaining high, the Fed is not as restrictive as they and the market thought.

Bottom Line for Investors:

Expect some volatility that we will manage through and ultimately take advantage of opportunities should they occur. We believe our portfolios are built to absorb some volatility and ultimately come out better.

We currently see a number of opportunities in the Closed End Fund sector, Blue Chip stocks, and as a temporary defensive investment short-term Treasuries.

As always, please don't hesitate to call or email with any questions.

Our Best Always,

Bob

Robert O'Braitis
CEO
Chief Investment Strategist