The Fed more than any other factor is driving this market. They control the money supply and cash is king right now. Markets rallied on April 28th after GDP numbers showed the economy contracted in the first quarter by 1.4%. Economists were expecting a 1% gain. Why did stocks go up as the economy contracted? The Fed. If the economy is not growing, then the Federal Reserve will have less incentive to raise interest rates and decrease the supply of money. More money available to grow your business and buy stocks equals higher stock prices (and other prices). Inflation must be combatted but it is unlikely that the Fed will do so at the expense of growth and jobs.
Given this reality, news and global events are all noise unless they push the Fed narrative further in one direction or the other. The Ukraine war, high inflation, and slowing earnings growth are all baked into market expectations at this point. The markets are already pricing in interest rate hikes up to 2.75% by year end (we stand at 0.5% today). Due to this dynamic with interest rates (at least in the near term), the worse things get economically the better the markets might perform.
As rates have risen this year, we have a seen pretty significant rotation out of growth stocks and into non-cyclical sectors like energy, materials, real estate, and consumer staples stocks. These “defensive” stocks typically have less volatility, trade at lower price to earnings multiples, and are less dependent on low interest rates. However, if we see the economy slow and rate hike expectations come down meaningfully, we will most likely get a reversal back into growth names (like Google, Tesla, etc). We advocate holding a portfolio with a balance between defensive and offensive stocks. While some people may get lucky holding concentrated positions that go to the moon, most of the time this doesn’t work out.
As we have seen over these past 25 months markets can change very quickly, and the punishment can be brutal. We have seen pandemic play darlings like DraftKings, Zoom, and Teladoc (and many, many others) decline 80% or more. Large-scale market declines like this have not been seen since the tech bubble burst in 2000-2001. We are still sifting though the current carnage to find the names that will emerge as winners (as Apple and Microsoft did following the tech bubble), but in the meantime it is prudent to steadily invest in a diversified basket of securities so your savings can overcome the erosion of inflation.