Opinion: Navigating waves of summertime stock market

George Timson

There are times the stock market can feel as rocky as the main channel of Table Rock Lake on a summer holiday weekend. There’s a good reason for this.

While sometimes the markets go through long, relatively calm and smooth periods, there are also times when they rise, fall and splash around with astonishing speed.

Recent times have been a perfect example of the latter.

You may recall last year was a particularly turbulent one for investors. Inflation, fuel prices, interest rate hikes and the war in Ukraine all combined to drag down the S&P 500 index nearly 20% for the year. It was the worst 12-month span since the financial crisis of 2008.

The good news is stocks have bounced back solidly so far this year. This is where the analogy of riding the waves in your boat really kicks in.

In January, the S&P 500 gained fantastic momentum and rose significantly, just to experience losses in February. Things got even more choppy in March, as we faced uncertainty in the banking sector with several large institutions becoming insolvent. As if that wasn’t exciting enough, summer started off with a bang as the United States narrowly avoided default with national debt ceiling negotiations coming down to the wire.

Despite the chaos, stocks have largely persevered so far with the S&P 500 up approximately 15% through the first half of the year. As always, certain sectors have been performing better than others. Technology stocks – which got pummeled in 2022 – have been leading the charge so far in 2023. That’s a good reminder not to keep all your eggs in one basket – or boat, so to speak.

As advisers, we continually measure risk in the market. We believe discipline and diversification are paramount to smoothing the ride. Throughout the first six months of 2023, we have been pruning gains from the most high-flying sectors, such as technology and industrial stocks, while slowly beginning to add to sectors such as energy that appear to be more attractively valued.

Looking forward, inflation likely continues to be the leading cause of boat-rocking market uncertainty and risk.

The initial spike in inflation began due to an explosion of economic activity after the COVID-19 lockdowns. People were shopping like crazy, armed with disposable income and historically low interest rates. This pent-up demand exceeded supply in many cases, causing prices to skyrocket. Inflation became further exacerbated by snags in supply chains and conflict in Ukraine. All these factors made it difficult and costly to get goods where they needed to be.

Lately, inflation has morphed. Now, the single biggest factor is not the price of goods but of services. People aren’t just buying things again; they’re doing things again – eating at restaurants, attending concerts, traveling. Meanwhile, a strong labor market has led to low unemployment and rising wages. Businesses have raised prices to compensate.

For these reasons, inflation remains stubborn, and you can see the glass half full or half empty. The half-empty view would be that inflation remains high, resulting in sustained high interest rates, slowing down the economy. The half-full view is these same factors keeping inflation high are also keeping us out of a recession. The more jobs there are, the more spending there is. The more spending there is, the more the economy will grow – or at least not contract to the point of recession. Only time will tell which way investors decide to spin it.

At the end of the day, the boating metaphor isn’t important because it’s summertime. It’s important because it contains good advice. When you board a speedboat, you generally know what to expect. It’s going to be bumpy, choppy and fast. You know there will be sharp turns that whip your head around and waves that make the pit fall out of your stomach. So, what do you do? You secure your belongings. You put on your life jacket. You brace yourself. As investors, it’s important we keep doing that so, ultimately, we end up at the destination we want, having enjoyed the ride.

George Timson is a wealth management adviser at SignalPoint Asset Management in Springfield. He can be reached at gtimson@signalpointinvest.com.