Could the market be working on a bottom this month? The low for the S&P 500 set on January 24 was retested in February and again in March. Each time buyers have come in and pushed prices back up. After the low on March 14th, the S&P 500 gained more than 1% each day for four consecutive days making last week the best week since November of 2020.
That is an encouraging sign for the market, and it seems possible we are watching a bottom form. There is more work to be done, and we know well that if sellers outnumber buyers on a future dip, prices could fall to new lows.
It was last week that the Federal Reserve Board met on March 15th and voted to raise the short term interest rate by 0.25% for the first time in over three years. This was widely expected so investors were not surprised. Raising the short term rate is one of the best tools the Federal Reserve has to tame inflation. An increase in rates should slow down economic growth and that in turn should slow down inflation.
Right now inflation shows no signs of letting up. The average price of gas in the US one year ago was $2.81/gallon. Today it is $4.25/gallon. Gas contributes to the price of all goods and services and prices are rising across the board. There are signs in the market that investors are expecting inflation to go even higher. The out performance of Treasury Inflation Protected Securities (TIPS) to the 10 Year US Treasury shows that bond investors are expecting more inflation. Another indication is the new highs set in commodity prices as measured by the CRB Index. Commodity prices rise in times of inflation.
When it comes to investing in the current environment, it is important to invest in sectors that perform well during high inflation and rising interest rates. Money goes somewhere and for the last several months we have watched a rotation from growth stocks to value stocks. Money is not leaving the stock market as much as it is rotating to companies that do well in the current inflationary and rising interest rate environment.
Commodity stocks are doing well right now. These include energy stocks and metals and mining stocks. The financial sector does well when interest rates are rising. We have observed strength in the last several months in insurance company stocks, a sub-sector of financials. Stocks in the basic materials and industrial sectors do well in inflationary times.
The broad indexes are dominated by technology and communications and those sectors have been lagging so far this year. They are hurt by rising interest rates. To have a strong market we need those sectors to be positive, but they don’t necessarily have to be the leaders.
We will continue to watch the price movement because it is a picture of supply and demand. It is too early to tell if we have seen a bottom, but we do like the strength we see in the market.
Call us if you would like to discuss your own account and how it is allocated relative to inflation and rising interest rates.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.