Rising Interest Rates & Where the Market Is Heading

In the latest MAI Market Update, John Zaller, Chief Investment Officer, and Chris Grisanti, Chief Equity Strategist, discuss rising interest rates and where they believe the market is heading. They examine the top-heavy nature of the market, how rising interest rates have impacted the economy in the past, and what they expect to see happen down the road.

Current Market: Top Heavy & Momentum

While it is a positive that the market is up nicely this year, it is extremely top-heavy. At the end of June, the S&P 500 Index was up about 16%, but if you take the biggest seven technology stocks out, the other 493 stocks were up only 4.5%. While the market can remain supported by “Goldilocks” conditions in the short term, our team is interested in looking at where the market is headed.

Where the Market is Heading

To see where the market is heading, experts typically look to the past – which currently gives a less-than-optimistic outlook. To expect a soft landing down the road, you would have to bet against history with the thought that things will be different this time. The reason our team is hesitant to do that is, in some part, because of interest rates.

This chart highlights the rate tightening cycles since the mid-1980s, showing the current tightening cycle is both the highest and the fastest rate increase in 40 years. With the lone exception of the 1994 rate hikes, the rest of these cycles were followed by recessions.

 Source: Evercore ISI (5/21/23)

Forecasting a recession is never a sure thing, but reviewing historical data often allows us to better prepare for what may happen in the future.

What Do We Do Now?

Don’t head for the hills yet! As mentioned previously, forecasts and predictions can be completely wrong.  This economic moment is particularly unique given the pandemic impact and the enormous COVID stimulus that followed. 

Even if a recession is coming, it is difficult to predict when it will show up. In the meantime, the market is in a pretty good place, with inflation declining and the economy remaining solid.  Instead of trying to time the recession, look to invest in quality companies that should come out of the other side of a recession in good shape.

Keep in mind – even in recessions, there are bargains. Healthcare has been largely ignored, and we see compelling values there. In addition, some consumer goods companies rose during COVID and then fell, but look interesting again now. The goal here isn’t to give stocks to buy, but to demonstrate that, even when the economy may take a downturn, there are almost always market segments that remain attractive.

Bottom line? Invest, but do it with your eyes open and keeping a long-term perspective.

If you have any questions related to this topic or your portfolio in general, please do not hesitate to reach out to your wealth advisor at any time.

Please send your questions, comments, and feedback to: info@mai.capital. Any statement non-factual in nature constitutes only current opinion of this author which is subject to change without notice. Certain statements are of future expectations and other forward-looking statements are based on management’s current views and assumptions. Any statistics mentioned have been obtained from sources we believe to be reliable, but the accuracy and completeness of the information cannot be guaranteed. Neither the information nor any views expressed should be considered investment, legal or tax advice, or constitute as a recommendation to buy or sell any security, strategy, or product. It should not be assumed that this is a forecast of future events or that any security transactions, holding, or sector discussed where or will be profitable or that the investment recommendations or decisions we make in the future will be profitable. Past performance is not indicative of future results.