Stock Rally Fizzles | The Investors Edge

By John Stewart, chief investment officer at Farmers Trust Co.

Week in Review: Stock Rally Fizzles

Two weeks ago I discussed the strong start for stocks in 2023, but warned that investors should be careful not to get sucked into the buying frenzy by taking on too much risk at the wrong time. Investors improve their odds of success when they buy after market declines, not by chasing stocks after they’ve already made a big move higher.

Even as stocks were rallying in January and into the first part of February, leading economic indicators and corporate earnings estimates were falling. This set the stage for a possible retrenchment in stock prices, and that’s exactly what has now taken place over the past week-and-a-half with the S&P 500 index down more than 4% from its 2023 high.

Recent inflation readings have shown that price pressures may not be coming down quite as quickly as hoped, and that pushed interest rates higher even as signs of economic deterioration continue.

The best defense against market uncertainty is to stay diversified, and stick to a disciplined plan of periodic portfolio rebalancing. This helps to put in place a mechanism to sell assets that have appreciated while buying assets that are on sale.

Featured Insight: Be Careful Relying on the Past

They say that past is prologue, and indeed many stock market patterns and investor behaviors repeat themselves over time. Nevertheless, it is important not to get too comfortable relying on the rear view mirror.

It is obviously natural for investors to look to the past for clues about the future – none of us have crystal balls. Nevertheless, the future is always uncertain, and many things can and do change over time.

For example, just because a company has grown earnings at 10% per year for the last 5 years doesn’t mean that rate of growth will continue indefinitely, or even for the next quarter.

Since valuing stocks relies on using data from the past to make assumptions, it will always be more of an art than a science. Be careful when selecting stocks that appear “cheap” on the surface. The collective wisdom of the market may know something about the future while you are focused on the past.

Looking Ahead: March Madness

No, I’m not talking about the upcoming NCAA basketball tournament, although for many sports fans that is certainly something to look forward to.

March tends to be a bit of a manic month for stocks if you look at historical seasonal patterns. The first half of the month tends to be weak followed by a strong rebound in the back half of the month.

I know, I know – I just warned everyone to be careful looking to the past when it comes to investing for the future.

Nevertheless, market seasonality is something to be aware of. Indeed, last year, the stock market declined sharply during the first two weeks of March before staging a significant rally that took the S&P 500 index up more than 10% between March 14th and March 29th.

If you’ve been sitting on too much cash and you’re looking to start dollar cost averaging into stocks for long-term investment, or if you’re underweight stocks and need to rebalance your portfolio, you may have a good opportunity in early to mid-March to buy the dip that started last week.

Copyright 2024 The Business Journal, Youngstown, Ohio.