Bull walks into a China Shop - May Market Update.

We are continuing on a ‘Journey’ and boy.... doesn’t the past 6 months feel like a whole year…..Let’s all take a deep breath, and not let the headlines get to us. Whether it is earnings, Fed moves, lending data, jobs report or what have you; the information about to come out (that’s to come) merely puts numbers and confirmation (and’s confirms) a reality that stocks have already lived through or long expected….

Are you feeling uneasy like Ferdinand in the opening Picture? If so, you probably aren’t alone. Between volatility picking up this week, when the S&P 500 fell more than -1%, and another US regional bank failing over the weekend, folks seem on edge.

My opinion, the general sentiment of late seems to be that stocks are just bouncing sideways and are primed for another drop down. So it might surprise you to learn that the Equity Funds up 16% since its October 12 low, and that the MSCI World Index is doing even better, up almost 20%. Bull Markets are born on pessimism.

?We have strong double-digit returns—returns that would look very nice in a full year, never mind a little more than 6 months—despite continued rate hikes, constant recession chatter, elevated inflation (but slowly improving), a debt ceiling standoff, heightened trade tensions with China and US bank failures.?

Remember, volatility is a two-way street and cuts both ways. It is hard to have the good kind without the bad kind sprinkled in.?That is where much of the sideways bouncy feeling comes from, no doubt. The good news? This isn’t unusual.

Quick note on Valuations

You will hear that many pundits say that P/E is still too high, and earnings downgrades only makes it richer. Let me make one thing clear. P/E ratios still aren’t predictive. I recently read an article arguing bonds will outperform as stocks take years to crawl back to breakeven—all because the S&P 500 and MSCI World Index’s above-average price-to-earnings (P/E) ratios imply returns will be weak from here. But valuations aren’t predictive, especially early in a bull market. Late in a bull market, a fast increase like this probably signals sentiment got too hot too quickly.

Stocks are leading indicators. They move ahead of earnings, usually pre-pricing expected profitability in the future. As a result, stocks usually start recovering from a bear market before the earnings decline has run its course. We saw this in 2002, 2009 and 2020—the early stages of the previous three bull markets. The effect was most apparent in P/Es, which compare prices to the past/ future 12 months’ earnings.?

Allocation

Looking at #Lipper Holdings database we see the Mixed Asset Managers have increased their exposure to equities. But hardly near the high back in 2021.?There has been a record amount of funds flowing into MMF(Money Market Funds)

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I can almost say with certainty, that we are in the phase of a young bull market climbing the proverbial wall of worry…. Let’s face it, the world is never perfect and always looks a mess.... Rather than get hung up on valuations and the near-term outlook, it is probably best to ask and answer a simple question: If you need equity-like returns to reach your long-term goals, does it make sense to sit out of stocks during a bull market? Dialing down stock exposure now—and raising bond exposure—could that mean reducing long-term return potential for that pool of money??

Thanks for reading.

Mate

PS this is not investment advice - pls make sure you do your own due diligence and evaluate your current financial situation.