Hi everyone, Jay Pluimer here with Flourish Insights. As the Director of Investments at Flourish Wealth Management, I take pride in providing our clients, colleagues, and friends with resources and information that can help them make strategic and effective choices regarding their investments. If you’ve been enjoying the show, be sure to subscribe on Apple Podcasts, Spotify, Google Podcasts, or wherever you get your podcasts, so you’ll never miss an episode.

Today, we’re talking about Silver Linings.

The current environment is full of dark clouds. The last couple episodes of Flourish Insights have discussed these economic and investment threats in detail, focusing on the War in Ukraine, fears of an impending recession, along with the tightrope walk for the Federal Reserve. It’s easy to fall into the habit of doom scrolling by scanning the headlines and bouncing from one piece of bad news to another. The fact is that we’re in a tough place right now with lots of things to be concerned about, but that doesn’t mean investors should lose hope for a better tomorrow.

Let’s start by revisiting the predictive power of the Stock Market. There have been many times where the daily and weekly ups and downs of the market seem to lack connection to the current reality. A perfect example happened in April and May of 2020 when most of the global economy was shut down as the COVID Crisis became reality. Despite the real concerns about personal safety and the future of life during a pandemic, the stock market was in the middle of a rally that would turn into the fastest recovery from a bear market in history. The surprising stock market rebound was actually the topic of the first episode of Flourish Insights and was titled “Why are markets booming in the midst of a crisis?”

We have experienced similar behavior from the stock market frequently over the past year where market returns didn’t seem to line up with investor sentiment or economic statistics. The market dropped almost 5% in September of 2021 during a period where corporate earnings were approaching 30% growth rates, unemployment had fallen under 4%, mortgage rates were hitting historic lows, and the zero-interest rate policy was supporting record consumer spending. On the flip side, the market rebounded 9% this past month despite an escalating war in Ukraine, record gas prices at the pump, supply chain shortages, and fears of a new COVID strain.

The reason that market returns don’t always line up to current events is that the stock market acts as a predictor of what will take place in the future. For example, the stock market rally in the Spring of 2020 reflected expectations for increased consumer spending during the summer. The market dip last Fall reflected concerns about rising rates of inflation while the recent market rally indicates confidence that the Federal Reserve will be able to significantly reduce inflation through aggressive interest rate hikes. However, although the stock market acts as a predictor of the future it doesn’t always get things right, particularly in periods of “excess exuberance” that led to market bubbles in the late 1990s and mid-2000s.

So what is the silver lining about the recent market recovery? I’ve been having a lot of client conversations lately where they are justifiably worried about the state of the economy and the potential implications for their investments. Constant headlines about an impending recession with record inflation and daily updates about the atrocities taking place in Ukraine are excellent reasons to be worried. At the same time, the stock market is more focused on what could happen in 6 months with the conclusion of mid-term elections, decreased inflation, a resolution in Ukraine, and supply chains that are working again. We have been guardedly optimistic about the market fundamentals in the US with strong corporate earnings and profits supported by high levels of consumer spending. Although consumer confidence has been dipping lately, that is frequently a contrarian indicator, so doom and gloom often points to an investment opportunity.

The optimism for an economic and market recovery in the Fall of 2022 doesn’t mean it will be smooth sailing over the next few months. There are still significant concerns about how the economy will respond to rising interest rates, questions about the Federal Reserve’s ability to walk a tightrope between inflation and recession, plus concerns about options for a peaceful resolution to the military situation in Ukraine. I expect to see relatively high market volatility over the next few months and will be closely monitoring the VIX Index, also known as the fear index, as an indicator of investor sentiment. In general, there are reasons to focus on the silver linings of the current environment rather than falling subject to doom scrolling negative headlines. We encourage clients and investors to look beyond the negative stories about today and look toward the future with hopes for a better tomorrow, particularly if the stock market is signaling a break in the clouds.

If you enjoyed this episode, please take a moment to rate and review us on Apple Podcasts so that more investors like you can find the show. And don’t forget to check out Flourish Wealth Management’s other podcast, Flourish Financially with Kathy Longo, available on all your favorite podcast providers. Thanks for listening, and don’t forget to stay focused and think long-term.