“Positive But Cautious”
The start to 2023 has certainly been a welcome reprieve from the difficult market of 2022. In the first quarter of 2023, the S&P 500 is up roughly 7% and GDP is expected to have grown around 2.0%. These are great figures and have provided some light at the end of what was a dark tunnel. No further drop in stocks and no recession….at least not yet. If you take corporate profits from Q4 2022 and the current ~3.5% yield on the 10 year treasury a capital profit model would suggest a fair value of the S&P 500 of around 3,900 which is lower than where it sits today.
As the excess money supply and stimulus continues to wear off and out of the economy we are cautious about how that will affect corporate profits. We might not have felt the full effects of this yet, but we will eventually. Exactly when that is felt is anyone’s guess, but we continue to remain invested yet cautious.
The policies we witnessed during COVID were unprecedented. Of significant importance is the historical increase in money supply which led to 40-year highs in inflation. Equally important is the sudden decline in money supply coupled with the rapid increase in interest rates. We personally believe the second half of that has not fully been felt yet and when it is felt it will lead to lower profits, more layoffs, and eventually more muted stock prices.
These thoughts, combined with our strong belief that in the long run stocks will be higher, lands us in the camp of remaining positive but cautious. Appreciating the gains we have seen, but remaining defensive as we continue into 2023.