In the second quarter (Q2) that just ended, the S&P 500 (one of the best gauges of the US stock market) gained 5.1%, the Dow Jones (a group of 30 stocks and the index is calculated in an odd way) lost -0.4%, the Nasdaq (tech heavy) advanced 8.6% and the Russell 2000 (small caps) retreated -2.3%.
The 5.1% advance in Q2 follows a strong Q1. If you look at how much the market has advanced and you at the same time compare that to volatility measures (i.e. risk measures), the markets have performed well (looking at return per unit of risk).
So we have had a good market, and the bull market is still in tact, but most technicians (analysts who study charts, trends, patterns, price movements, etc) agree that the market is short term overbought, has gotten ahead of itself and is due for a pullback.
The market is not cheap, but market valuation metrics make for terrible timing tools. The market ran up considerably in the first half of the year and is unlikely to do as well in the second half.
In the underlying economy, writes Chief Investment Officer (CIO) of Nuveen Saira Malik, there have been some “widening cracks in the investment landscape.” The US labor market has weakened, personal consumption has declined and economic growth has slowed. No impending signs of a recession or a bear market, but reasons for caution and less optimism.
All that combined with interest rates higher for longer, the final bit of above target inflation remaining sticky, Nuveen is either neutral or positive on most asset classes and recommends employing a portfolio construction that has exposure across asset classes and one that is broadly diverse. (Below graphic indicates their views of various asset classes)
One other thing to be prepared for is Q3 weakness. Even last year, which was a very strong year, we had a weak third quarter. That weakness bled into the fourth quarter (culminating in a weak October). In that case and as it has done in the past, the market recovered. In 2022, the bear market year, the market sold off in Q3 and bottomed in October. This is not usual as it is a seasonally weak period. Thus, being prepared for summer weakness is appropriate.
Because consensus is often wrong in both directions and because the market is usually hard to predict on a short term basis, success in investing, especially goal based investing with medium to long term investment horizons comes down to maintaining market exposures (even when it feels uncomfortable) and consistency, consistency, and consistency.
That reminds of a 2007 bet legendary investor Warren Buffet made. He bet a hedge fund manager (Ted Seides) $1 million that the S&P 500 would outperform a basket of handpicked hedge funds over the course of a decade. Seides picked 5 different fund of funds (all hedge funds). The result: Buffet “triumphed decisively.” The point is, maintain (some) market exposure, buy high quality assets, and recognize pullbacks, corrections and even bear markets and large drawdowns will take place, with the understanding that the market will be worth more in the future than it is today.
To learn more about Meridian's market views and how they are incorporated into investment portfolios, reach out to us to schedule an introductory phone call at (843) 212-6828 or contact@meridianria.com.
About Joshua
Joshua Henry is the founder and Managing Principal of Meridian Financial Advisory (meridianria.com), an independent, fee-based wealth management company located in South Carolina, serving people locally and across the country, that focuses on providing wealth management solutions primarily to affluent individuals over age 50 and their families. Joshua is passionate about helping people have a better life by designing and implementing customized financial plans that bring clarity and confidence. Joshua is a CERTIFIED FINANCIAL PLANNER™(CFP®), a Certified Investment Management Analyst® (CIMA®) Professional, and earned a Bachelor of Arts degree in Political Science from Cedarville University and a Master of Business Administration degree with a concentration in Corporate Finance from Salve Regina University. The courses for the Corporate Finance concentration were taken from the Kelley School of Business at Indiana University. He has held workshops on Social Security Claiming Strategies, IRA Planning, and Career Coaching for Executives in between jobs. Josh has also taught finance at the university level. When he’s not working, Josh teaches adult Sunday School at his church in Pawley Island, SC. He enjoys traveling, reading, and time with his family. To learn more about Josh, connect with him on LinkedIn.
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