In the July update for The Seven Signs of a Changing Economy, I wrote that it would not be unexpected to see market values steady here.

Through July and August, the Federal Reserve is widely expected to increase interest rates to fight inflation. 

On 7/27/2022 the Fed did, as promised, raise interest rates +.75%.  This was expected and priced into the Valuations of Corporate America.  So, market values did not drop and instead increased.  In addition, Fed Chair Powell "talked" the values higher by explaining how the Fed is on the inflation and recession case scenarios and will stay nimble as they fight both fronts. 

This "Fed Speak" is a positive catalyst that suggests the lows for this negative market are in. Personally, we are planning to sit on the cash we have raised with the intent to invest before a likely vicious mudslinging mid-term election on November 8, 2022. But that reallocation is open to change as data flow dictates. 

Until now we wanted to wait for this draw down to run its course, as they “always” have, or we wouldn’t be correcting from an all-time high valuation. The action point was to then use the current cash plus any new cash deposits to thoughtfully add to our investment positions during the summer and into fall 2022. That plan is still the plan.

If you choose to add cash this could be a good point to act.

I hear you asking! “Jim, is it really possible that we are clicking along the bottom of valuations here?” Well, the DJIA crashed on October 19, 1987, from a price to earnings ratio of 24x. Price divided by earnings (P/E ratio) is a measure of risk. 24x was high. So, as you review the current P/E ratios below from my friend, Mike Williams at Truvestments on 6/11/2022, ask yourself this, crash to what? Rhetorical, but worth asking.

Current Price to Earnings (P/E) ratios:

S&P 500 with technology: 16.70x

S&P 500 with no technology: 11.80x

Large Cap Growth: 10.90x

Small Cap 600: (already crashed) 6.95x

Again, versus 24x in 1987. In my opinion, there could be some serious opportunities to invest several different times going into this fall. The only mental mind trip will be that if you choose to take the opportunities, you will feel a little sick doing it and you won’t know if you/we were correct for about two years.

I know this feeling from prior experience, and each turned out to be a profitable window. Personally, I am getting excited for these moments of truth.

Valuations are off the floor, but not yet out of the basement.  But the trend appears to be forming toward the next trek upward. 

As always, our WSG team remains focused, thoughtful, and ready to act as opportunity knocks.  

I’m interested in your thoughts, comments and observations.  Feel welcome to call, email or stop by the office and say Hi.

Respectfully,

James O. Lunney, CFP®

CERTIFIED FINANCIAL PLANNER™ Professional  

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.  Investing involves risk including loss of principal.  No strategy assures success or protects against loss.