Certainly, we respect that the Bloomberg 3000 Value index ended in the red last week (as did the S&P 500 Equal Weight index and the Russell 2000 SmallCap index), cutting into the performance advantage since last Halloween for inexpensively priced stocks,…
…while we concede that there has been tremendous dispersion of returns in stocks that we favor this month,…
…but the equity markets, all things considered, have hold up relatively well during the historically weakest month of the year.
True, the historical propensity for stock prices is to move higher over time,…
…albeit with trips to the downside every year,…
…but the news of late have been dominated by “obvious” issues that financial pundits have been quick to blame any time there has been a daily decline. It is not that headlines for weakness in equities such as Bond Yields And Oil Prices Roil Markets, (as appeared in Friday’s edition of The New York Times), don’t sound logical, but the U.S. has been involved militarily in the Middle East for 36 years.
Yes, this time is different, as is every time, but we have had energy-price spikes before and long-term-oriented investors have historically benefited from remaining invested through prior oil-price shocks, although recovery periods and interim losses varied. Interestingly, there has been a 98% total return for the S&P 500 since the peak in crude in 2022 following Russia’s Invasion of Ukraine.
Of course, past performance is never a guarantee of future returns or even profitability, while the jump in energy prices has kept inflation elevated, but Value stocks, on average, have performed better over the long-term subsequent to higher (not lower) readings on the Consumer Price Index than today’s 3.4% level.
And for those concerned about the three-plus additional hikes in the central bank’s lending rate that are presently projected by the Fed Funds futures market,…
…the body of evidence, on average, again supports staying the course in stocks,…
…especially as the six prior full-fledged Fed Tightening cycles have all seen positive equity returns.
No doubt, the doom-and-gloom crowd will point to last week’s big jump in Treasury market yields as the 10-Year moved above 5% and the 30-Year briefly moved above 5.5%,…
…but here is what the history books have to say about average stock returns and 10-Year Treasury yields above and below the current 5.16% rate.
We also can’t forget the double-digit percentage equity market returns that have occurred over the last five years, when the 10-Year yield soared from less than 1.5% to more than 5%,…
…resulting in significant losses for intermediate- and long-term Treasury ETFs.
Of course, we are not suggesting that stock prices are indifferent to interest rates as higher yields on competing investments should make equities less attractive, while rising financing costs should weigh on business decisions. Further, the move up in rates last week was sharp, with a 15-basis-point increase for the 10-Year on Wednesday alone.
Not surprisingly, that worst day for government bonds in 18 months and the break above 5% led to a lot a chatter about how stocks are now sitting in historically dangerous territory, even as the 10-Year averaged 6.44% during the 1990s,…
…when equities enjoyed returns well above the historical long-term average.
Still, we realize that there were a couple of rough patches for stocks that coincided with previous plunges in the bond market,…
…but those trips south were short-lived,…
…while a study of the periods since 1990 where the rolling-3-month yield change exceeded the historical mean by one standard deviation and/or the rolling-3-month yield change exceeded +50 basis points on an absolute basis shows a majority of positive equity returns.
To be sure, there will always be downturns, selloffs and corrections in our future,…
…but the gains during the Bull Markets have exceeded the losses during the Bear Markets by a wide margin,...
…and history shows that the longer the holding period the less the chance of loss for stocks.
So, while we are always braced for negative market action, and the equity futures are suggesting the new trading week will get off to a poor start, we continue think Value stocks are attractively priced,…
…and we like that corporate profit growth is projected to remain strong,…
…as over time stock prices have followed earnings higher.
Stocks in the News
Chris Quigley and Jason Clark and provide pertinent updates…
