Rising interest rates lower the present value of future earnings for companies, which can cause stock prices to decline. Furthermore, the attraction to own fixed interest rate investments like CD’s and money market funds vs. stock market investments increases as interest rates move higher. Fixed interest rate investments tend to move in tandem up and down with inflation rates while stocks often act inversely.
As an experiment, I took a crack at letting ChatGPT write this quarter’s market commentary. It was quite impressive how quickly it built the page. It took less than 30 seconds! Then, I read through it, and I was reminded that speed is not a substitute for accuracy. In the section regarding U.S. markets, it stated that market indices were at all-time highs, which is woefully incorrect. None of the U.S. stock market indices have regained their high points set back in late 2021. Next, it wrote a paragraph citing climate change and how renewable energy stocks are benefitting from accelerated acceptance and supportive policies. In fact, the most widely held clean energy ETF, iShares Global Clean Energy ETF, is down mid-single digits year-to-date in percentage terms so far in 2023. Suffice to say, artificial intelligence has some room for improvement.
Approximately 50% of the NASDAQ 100 Index is concentrated in just seven stocks – Meta, Apple, Google, Microsoft, Amazon, NVidia, and Tesla. These seven stocks had a solid quarter in performance terms, yet only Apple stock is trading anywhere near all-time highs set back in the fall of 2021. Perhaps, these seven stocks were viewed by investors as a “safe haven” amidst a broader stock market that does not look much healthier than it did in all of 2022.
2020 was a year full of alarming statistics. One you maybe didn’t hear was that over 10 million new brokerage accounts were opened by first-time investors in just the United States alone! This influx was the result of three things: stimulus checks, a pandemic-induced market selloff, and the elimination of trading commissions at brokerage firms such as Schwab, TD Ameritrade, and Robinhood.
The $1.7 Trillion bipartisan spending bill pushed through by Congress at the end of the year was a kick to the gut for investors who were hoping we’d see inflation abate more quickly. A leading research company, Hedgeye, describes it best saying, “We remain in a new, higher inflation volatility regime brought on by deglobalization, confounding energy policies, war, and a wholesale disregard for fiscal prudence at a time of record government indebtedness.”1
From the June 15 lows, the stock market experienced a relief rally lasting one full month before falling back to re-test its lows of the year by the quarter’s end. These are the moves typically experienced when a market is under duress – often referred to as “bear market rallies” and “bear market selloffs”. Out of this volatility, a noticeable behavioral pattern develops among investors. When markets are fiercely advancing upward, investors catch a case of “FOMO” – the fear of missing out – and they want to be “all in”. Conversely, when markets are fiercely declining in value, investors get panicked and want to run for the exits. These traits only become amplified when these market gyrations occur on a day-to-day basis.
