Advisor Perspective

Prompting critical thinking and conversations around issues in our industry. Not intended as personal financial advice.

When is the market going to rebound?

We feel like everyone is asking this question at the moment. So, we thought it would be helpful to share our opinion. The short answer is that we don’t think we will experience a material and sustained rebound until we gain certainty around interest rates. The stock market hates all forms of uncertainty and is particularly sensitive to interest rate uncertainty. 

On one hand, higher interest rates are really beneficial as we actually get paid something for our money in the bank and lower risk investment vehicles become more attractive. On the other hand, higher interest rates are problematic for the stock market. When you choose to invest in the stock market, you are also choosing to forego getting paid interest on a CD or a bond. So, it is only rational to invest if you believe your return is going to be higher in the stock market. That is generally easy to believe when rates are stable, but harder to believe when you are convinced rates are going higher. Right now, many people assume rates are going higher.

In the last 12 months, the yield on the 10-year US Treasury Bond has increased by over 170%. This yield recently rose over 3.8% for the first time since 2018, and last Wednesday the Federal Reserve announced a 0.75% rate increase. The thought that this trend will continue may make people hesitant to maintain a long-term view and invest in stocks.

So, what will change this rising rate environment? We believe that inflation is mostly attributable to supply disruptions that will be solved by hardworking people. As these issues are addressed, we will begin to see the rate of inflation decline and the Federal Reserve will likely stop raising interest rates. Notably, we don’t feel rates need to be lower for markets to rebound, but they do need to be stable and predictable. 

Additionally, we feel we are in the middle of a natural lag for inflation coming under control. By a lag, we mean that consumer prices will decline on a delayed basis to input prices. We think lumber is a good example of what we’re trying to express. Pre-COVID, a thousand board foot of lumber was priced at about $450. Prices peaked at over $1,600, which led construction costs to skyrocket. A thousand board foot of lumber is now trading at about $545, but this hasn't necessarily translated to lower construction costs. Many people have been waiting a long time to get projects started based on old quotes. Unless those clients push back on the contractor to lower the price, then the rate of inflation persists. Naturally, some clients may not push back because of impatience to get their projects completed. Other clients simply may not be aware of declining input costs. However, ultimately, the contractor will have to adjust prices downward. We feel this natural lag is taking place in many areas of the economy, not just lumber. Unfortunately, we don’t know how long this process will take, but there is a lot of evidence that it is underway, which we find encouraging. 

Bottom line: We have confidence that the rate of inflation will subside and interest rates will stabilize, even though the timing is hard to predict. We feel it is prudent to be patient and stay invested as investors will be well rewarded when interest rates stabilize.

If you’re interested in discussing strategies for this market environment, we are always available for the conversation.