Download the 5.3.24 Dynamic Market Update for advisors’ use with clients

By Kostya Etus, CFA®, Chief Investment Officer, Dynamic Investment Management

Rate Debate Goes On

 April was a rough month for the market, with the S&P 500 down over 4%, the worst monthly return since September of 2023. With that said, we are still on track for a strong year and the S&P 500 is actually still up over 20% from its lows last October (meaning we are still in bull market territory). Market weakness for the month was primarily driven by uncertainty around interest rates as inflation appears to be stickier than expected. Interestingly, stocks rebounded toward the end of the month given some good news from corporations.

Let’s review some of the latest data:

1. The Good: Stronger Corporate Earnings – According to FactSet, with 46% of S&P 500 companies reporting results, 77% have reported a positive earnings surprise and 60% have reported a positive revenue surprise. Companies are showing resilience in the face of high inflation and high interest rates, helping to boost stock prices.
2. The Bad: Weaker Economic Growth – Gross Domestic Product (GDP) growth increased at an annualized rate of 1.6% in the first quarter, well below estimates of 2.4%. One of the more impactful contributors to the low print was a slowdown in consumer spending, perhaps a sign that high interest rates are starting to weigh on households.
3. The Fed: Inflation Sticky – The Federal Reserve’s favorite inflation metric, the Core Personal Consumption Expenditures Price Index (PCE) came in at year-over-year increase of 2.8% for March, above estimates of 2.6%. The Fed is watching for inflation to move closer to their target of 2% before starting to lower interest rates.

The Fed has a tough balancing act to achieve in terms of moderating inflation with higher interest rates, while avoiding a recession. Despite persistent inflation last month, it appears that the economy and consumer spending are cooling down, which may translate into lower inflation going forward. Meanwhile, corporate earnings continue to support stock market strength. We reiterate the view that any more rate hikes are unlikely and we simply need to be patient for the Fed to begin trimming rates.

 How Stock Picking Works

A couple weeks ago, I had the pleasure to volunteer at the Junior Achievement Stock Market Challenge in Lincoln, Nebraska. It was a very fun event with over 600 high-school students from 27 schools competing. The rules of the competition were as follows: each team starts with $1M and trades stocks over a 60-minute period, each minute represents a full trading day. News releases are published regularly and can have different impacts on stock prices. The team with the highest net worth at the end of the hour wins.

While this was a theoretical stock trading competition, I couldn’t help but notice some real-world similarities:

1. Headline Chasing – Every time company news was released, everyone jumped out of their seats! Many teams were buying a given stock, and interestingly just as many were selling that same stock. They were guessing, hoping to get lucky. Company news headlines are designed to get investors’ attention, not necessarily to be used as an investment decision making tool. And often times the investment decision is based on the reader’s interpretation of the news. This creates a lot of volatility in prices based on supply and demand dynamics, not based on fundamental health and growth potential of a company.
2. Performance Chasing – Many teams simply waited for stock prices to move up after a given news update and proceeded to purchase, hoping to participate in the upward movement. Unfortunately, that often left them with losses as prices reverted back to starting levels, often quickly. Investors tend to buy into companies at peak levels due to fear-of-missing-out on strong historic returns, and forget that stocks move in cycles and may drop in price when they become overvalued.

3. Slow and Steady Wins the Race – With over 100 teams competing, the final results were astounding: 3^rd Place ended slightly over the starting $1M, while 2^nd and 1^st were closer to $2M. Thus, two out of a hundred doubled their money (2%), while almost everyone else ended up with less than what they started with! This is the risk with stock picking, particularly in high-frequency. A diversified strategy, including allocations to many stocks across different asset classes, as well as staying invested for the long-term, is often a better approach to reach your long-term investment goals.

Stay diversified, my friends.

 Junior Achievement Stock Market Challenge

Source: Kostya Etus

As always, Dynamic recommends staying balanced, diversified and invested. Despite short-term market pullbacks, it’s more important than ever to focus on the long-term, improving the chances for investors to reach their goals.

 Should you need help navigating client concerns, don’t hesitate to reach out to Dynamic’s Investment Management team at (877) 257-3840, ext. 4 or investmentmanagement@dynamicadvisorsolutions.com.

 Disclosures

This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives.

This commentary is not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investors should not assume that investments in any security, asset class, sector, market, or strategy discussed herein will be profitable and no representations are made that clients will be able to achieve a certain level of performance, or avoid loss.

All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed as to its accuracy or reliability. These materials do not purport to contain all the relevant information that investors may wish to consider in making investment decisions and is not intended to be a substitute for exercising independent judgment. Any statements regarding future events constitute only subjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially and no assurance is given that these statements or assumptions are now or will prove to be accurate or complete in any way.

Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed.

Investment advisory services are offered through Dynamic Advisor Solutions, LLC, dba Dynamic Wealth Advisors, an SEC registered investment advisor.

Photo: Dan Senft Photography