December Newsletter to Clients

Enjoy this month’s edition that features a check on stock market predictions from September, a note about bond yields and a hearty thank you to our clients.

In our September newsletter we reviewed strategist’s predictions of the direction of the U.S. stock market through the end of 2022. Here is what they said:

Jeremy Grantham, strategist at the investment firm, GMO, believes “the worst is yet to come.” He bases that opinion on his belief that stocks, bonds, and housing are all over-priced. Combined with the Federal Reserve’s efforts to tame inflation by raising interest rates and Grantham sees a mixture ripe for further declines.

A survey of eight U.S. stock strategists by Barron’s revealed a much more optimistic picture. The average target for the S&P 500 was 4185, up 6%, by the end of 2022. Now, their estimates range from 3600 to 4800, quite a large span. 3600 would mean a further decline of about 8% over the last four months of the year. J.P. Morgan’s chief U.S. equity strategist predicts a year-end target of 4800, based on his expectation that companies will buy back their shares due to their lower prices. He also expects several billion dollars a day to flow into equities over the next few months.

While the year isn’t quite over yet, how accurate were these predictions?

Today, the S&P 500 Index of large, U.S. companies stands at 3942. That’s up 1.8% from the 3871 value on September 15. It certainly seems unlikely that the average prediction of a 4185 finish will come to fruition and, fortunately, it also seems unlikely we’ll see a decline to the low prediction of 3600 either.

There is a lesson here: Not even so-called experts know how the stock market will perform in the short term. No one. These strategists, selected by Barron’s because of their high-level positions with prestigious companies, missed their target by 6%.  Over the long-term, however, history shows the stock market has weathered recessions, high inflation, wars, pandemics, and all kinds of general uncertainty for decades and, still, marches steadily higher over time.

Bonds

Occasionally we write how we keep as close an eye on the bond market as we do stocks because of what bonds can tell us about the economy and investors’ attitudes. As the Federal Reserve has increased interest rates this year, bond yields have risen. Counterintuitively, rising bond yields push bond prices lower – impacting our portfolios. The yield on the 10-Year Treasury was 1.44% a year ago and is now 3.5%.

The good news about bond yields overall is that yields are back closer to historical levels. Interest rates at near 0% over the last decade or so hurt retirees’ ability to generate income from their bond holdings and also encouraged investors to take out-sized risks on companies that were valued higher than they were worth.

Recently, however, bond yields have declined somewhat. Some believe that’s a signal that investors believe a recession, albeit a mild one, is on the horizon. Bonds can be a safe haven if we see a recession that impacts company earnings and, as a result, further erodes stock prices.

Thank you

Words can not adequately express how much all of us at Moneywatch – Ramsey, Bob, Lee, Robert and Steve – appreciate each and every one of you. Thank you! And, remember, the New Year is a great time for updating goals and financial plans – come see us!

Thank you for your continuing confidence.