If you've been looking for some insight into where the markets are headed, you've come to the right place. This article will cover the key issues facing the stock market right now, including valuations, commodity prices and more.
Stock valuations remain well above their long-term averages
The stock market has had a tough year so far. In fact, the S&P 500 has dropped an average of 10 percent from its highs in the past three years and two months. And it's not the only asset class in trouble.
But there are some signs of life for the broader economy. For example, the Federal Reserve is getting a little more aggressive with monetary policy. It has pumped nearly nine trillion dollars into the economy. This means that the economy will have more capital to expand the economy and create more wealth.
And while the market hasn't performed its best in the first half of the year, that doesn't mean it won't be good later on. If you are able to make an informed decision about where to put your money, you can get a good return on your investment.
One thing to consider is the size of your risk appetite. For example, you might have to sell your stocks if you need to pay for a new car or pay for your child's education. You might also need to sell your stocks if you are going through an economic downturn.
For the longest time, the S&P 500 has exhibited a consistent record of making the most of its investments. However, you should not underestimate the risks involved. Even the smallest of blips can cause your portfolio to underperform.
Another thing to remember is that the stock market is a long-term investment, and it can't be predicted when it will perform the best. There are a number of factors to consider before making your final decision, such as your investment horizon, whether you are interested in dividends, and whether you are willing to make long-term tradeoffs.
Consumer balance sheets are still healthy but saving rates are getting precariously low
The latest data on household balance sheets have shown that the consumer is still the driving force behind our economy. Although the latest numbers aren't as strong as they once were, they still suggest that consumers are the engine room of the economy. In fact, the consumer is one of the largest sources of capital, and its ability to draw down savings is key to sustaining consumption.
The household balance sheet has been on a continuous upward trajectory for the past two decades. During the last decade, debt declined relative to income and assets increased in tandem. This was the result of lower valuations and liquidity support. And while household debt may have increased in real terms over the past decade, it's still far from skyrocketing.
There are a number of reasons to be cautious. Some have pointed to the reluctance of banks to lend or the lack of consumer confidence in the US and other advanced economies. A large share of saving has also been exported in the form of current account surpluses. But as the chart below indicates, household balance sheets are still healthy and will remain so.
The best way to evaluate this is to look at household balance sheet data at the country level. Using a broader set of countries will allow for more robust conclusions, especially when it comes to the quality of data available.
Another option is to examine the micro-level data on firms and their owners. This type of analysis is only possible in countries that have had a household wealth survey in place for at least the past few decades. As with any other statistical analysis, the results of such studies are a mixed bag, but they do provide some insight.
Commodity prices will correct in coming months
The S&P Goldman Sachs Commodity Index has lost nearly 5% of its value in the last month. This is despite the fact that commodity prices have hit all-time highs. It is unclear how long the recent increases will hold.
Commodity prices have been impacted by a variety of factors. They include exchange rate changes, war in Ukraine, and supply disruptions. These issues have also affected commodities in other sectors, such as lumber. In addition to these issues, the United States and China are both experiencing economic slowdowns.
As a result of these issues, there has been a major decline in many commodity prices. The US stock market has also fallen, and government bonds have declined as well. However, this hasn't tempered expectations for a Fed interest rate hike in the near future.
While the global economic slowdown is a key risk, the supply of raw materials is also an issue. The lack of exploration has led to dwindling stockpiles. Additionally, there are concerns about energy availability in Europe during the winter.
Higher energy prices could also contribute to higher food prices. In this case, it's important to keep a close eye on the currency. A weaker currency can lead to deeper food and energy crises.
According to Goldman Sachs, commodity prices are poised to take a turn for the worse in the next couple years. It will be hard to predict how far the negative sentiment will last, but the current environment may be an opportunity for investors to benefit.
Another factor that could play a role in commodity prices is the Federal Reserve. The Fed is raising short-term interest rates. Rate hikes have led to increased volatility in the commodities markets. Because of this, investors should temper their expectations for the Fed's policy in the near future.
A weaker U.S. dollar could be the trigger for non-U.S. developed market equities to outperform U.S. stocks
Stock markets have been on a wild ride in recent years. The markets have experienced a gyration in volatility, a variety of economic trends, and several dramatic shifts in the way investors approach the market. It's a great time to reexamine equity allocation plans. But, it's also important to keep in mind that markets may not always act in our favor.
As a result, we can expect more diversified returns as markets expand. However, some investors are wary of adding more international exposure to their portfolios. They fear that profit margins will weaken as the economy slows down. Despite this, some sectors have been strong and are likely to continue to advance.
Emerging markets have provided an opportunity for diversification that many investors have overlooked. These regions are experiencing robust real growth rates and offer attractive valuations. With the US dollar weakening and interest rates expected to remain low, emerging markets should be more attractive than US stocks.
Several key regions, including Japan and the euro area, have implemented larger stimulus packages than the US. This should help spur global economic recovery. However, it's also possible that these regions' economic growth will slow down, putting pressure on the US.
US mega-caps have enjoyed strong returns in recent years. However, they could be under siege by a range of regulatory measures. If this occurs, there's a risk that sentiment towards these companies will reverse.
For this reason, an active investment approach is needed. Choosing companies with the best return potential is a process that involves taking a close look at several different factors.
There is a broad dispersion in earnings across industries. In addition, some stocks are undervalued. Investment securities such as derivatives and preferred stock can be leveraged. Leveraged investments are particularly vulnerable to stock price declines.
Emerging market stocks are on the cusp of a bull market
In the last three months, emerging market stocks have rallied 20%. That's impressive for a market that's often seen as one of the worst performers. But it's not a perfect time to invest.
Although investors are optimistic about the global economy, a number of geopolitical and economic factors could cause volatility in the months to come. This may include China's reopening and a full-blown trade war, a "coronavirus" that could impact the global supply chain, and more.
Amid all of this, the S&P 500 has stayed stable since the middle of October. The index is almost certain to reach a record 3,453 calendar days without a 20 percent drop. However, Jim Stack of money management firm InvesTech Research warns that another bear market could cut about 40 percent off of the stock market.
According to Savita Subramanian, head of quantitative strategy at Bank of America Merrill Lynch, "The risk of overconfidence in the market is real." She points to the fact that there are plenty of other countries that are outperforming the U.S. Those markets are Taiwan and Korea. They have a better track record of leading recovery cycles.
These countries are also gaining strength as the US weakens its dollar. With a stronger currency, companies can acquire better borrowing rates. Thus, it is a good time to buy emerging markets plays.
One of the best ways to play the recovery is to invest in international stocks. Valuations are relatively cheap in Asia and Taiwan. Stocks that are exposed to China are a good bet.
If China continues to grow, then the Chinese consumption surge should boost EM stocks. Meanwhile, the surging demand for goods could help drive global inflation and push central banks to raise interest rates.
