Stock Market Surprise?
Stocks so far this year have been on a roll of late, with overall close to a 16% return. Nasdaq, with all its tech stocks, is up 39% this year. Small stocks are not faring as well with the Russell 2000 at around 8% return this year. Important to note, the year is just a little over halfway and we have not weathered what traditionally is the worst months for the stock market, September and October.
Still for me, this has been a pleasant surprise. Don’t forget we are coming off a 2022 which saw the S&P 500 come in with an -18.11%. So overall we are just now getting this back. The Nasdaq was down 33.1% for 2022 so there also we are finally in positive territory.
Inflation and the raising of interest rates to fight it has been the theme. Where we go from here into the rest of the year depends, in my view, on the Federal Reserve and where interest rates end up. Lower oil prices have been the key deflation help so far this year. We are still very much in an oil dependent economy. Just about all goods and services run on oil and having it at a lower cost this year has been a key inflation fighter.
Inflation is caused by too much money chasing too little goods. More supply along with less demand in some parts of our economy have caused inflation to moderate so far this year. Year over year it is at or near 4%. This time last year it was double this. Hopefully, we will continue to see double digit inflation in our rear-view mirror.
What makes Americans happy are jobs, especially jobs that pay a decent wage. We have added jobs at a pace of 312,000 per month for the first part of this year. That compares to 163,000 per month in 2019. We are still adding jobs at a healthy rate which over the long term will drive spending and growth.
Economic growth in and of itself does not cause inflation. Yes, we can have economic growth and benign inflation at the same time. Supply has proven to be the true elixir to high inflation. Interest rates have risen, and the cost of housing is up because of it; or is it more likely we just have more demand than supply for housing? I choose to believe the latter. If we want to truly put a dent in housing inflation, do everything we can to encourage the supply of housing. Eventually housing should stop increasing in price as much. Market forces along with buyers and sellers will eventually balance things out.
One of the forgotten virtues of stock investing is dividend collection. The S&P 500 currently pays 1.5% every year in dividends, these add up and help an investor’s overall return over a period of time. Over the last 100 years your total return on stocks when dividends are reinvested is 10.4% compared to 6.24% when dividends are not reinvested. Stocks used to pay on average larger dividends; so this is a bit skewed considering 100 years is a long time. More recently share buy backs rather than dividend payments have been more popular. It really is up for debate which is better for the investor. Like anything else it depends on what industry, what business prospects are, etc. I prefer they pay me cash and I can decide. Warren Buffett and many large investors generally prefer share buy backs in many situations, most likely because that could be more tax efficient for them. Either way investors win in the long run.
All eyes will be on the Federal Reserve for the rest of the year to see if they continue to raise rates or not. If the Federal Reserve continues to be aggressive with its rate raises, eventually this will put a damper on the stock market. If on the other hand they moderate their increases, we have a great chance to get back some net gains over 2022, which would be a good thing.
Hope you all have a great second half of the summer.
Thanks, Andy McClung CFP TM
RE: Forbes Wayne Dugan; nasdaq .com market team; Market Watch; CNN Alicia Wallace Y charts; Wealthy Corner Jake
2023 Market Results
S&P 500 +17.7%
NASDAQ Composite +34.8%
Dow Industrials +4.1%
Russell 2000 +9.6%
World ACWI +15%
Source Wall Street Journal 07/17/23