Fifteen days ago, the stock market was selling off and volatility spiked to a high not seen since the Pandemic and Great Financial Crisis. Today everything is hunky dory. But is it?
Unlike all the “experts”, I can’t predict the future. I have no idea where the market will go tomorrow. I use current valuations to estimate future prices. The fear that crept into the market a couple weeks ago actually encourages my cynical optimism. And I expect volatility to increase over the next few months. July-October tends to be the most volatile. Things will likely get choppier as we approach the November coronation.
Unless there’s a material change, I would consider selloffs as a buying opportunity. Yes, the economy is slowing, and unemployment is on the rise…but that’s been the intent of the Federal Reserve for the past two years. The fact that a recession didn’t occur last year, in the wake of near unprecedented interest rate hikes, attests to the strength of the USA economy (and the long term generational changes that are in place).
This slowdown could morph into a recession, but it could also be short lived. The Fed’s ability to cut rates is the highest it’s been in a quarter century. If the economy starts to go off the rails, they can throw a lot of money at it, quickly.
I’m not pollyannaish and I don’t see the world through rose colored glasses (I prefer a green currency tint). But I am a pragmatist. I was extremely concerned about a recession last year. Not because of the gloomy zeitgeist, but because the Fed was purposely trying to create one. And it was being foreshadowed by two reliable factors that I track- 1) Conference Board Leading Economic Indicators & 2) Small Cap Stock Index Long Term Moving Average. This year, both aspects are still depressed, but they have shown improvement.
Note the below chart illustrating the Small Cap Index compared to its long term moving average (~ 1,000 day moving average). The yellow highlighted area shows the extended period of time the index remained near or below its long term moving average. Major recessions and corresponding stock market crashes occur below that moving average. Thus, one of the major reasons for my concern last year.
But this year, Small Caps have been improving. Two weeks ago, when volatility spiked to historic highs, the RUSSELL2000 never dropped below its 200 day moving average, nor did it officially correct from its recent high price (dropping only 9.5%). That’s a sign of resilience, not weakness.
Those are my thoughts, and you can hear them articulated on episode #451 of the Wealthsteading Podcast.
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