The stock market made some positive traction this past month. While I welcome the gains, I don’t believe this is the end of volatility—there are still some items that the market must digest.
First, the Fed has been continuing its crusade to tackle inflation by increasing interest rates. Each time they raise interest rates, they take a chunk out of the earnings of many companies that rely on financing for their projects. By slowing corporate profits, corporations have been trimming the fat leading to many layoffs. While the job market is still considered robust, I imagine more interest rate hikes will further dampen the job market.
Second, the war in Ukraine has been lasting longer than initially anticipated. Despite heavy casualties on both sides and several western countries supplying Ukraine with munitions, the war has been slow-going, with many battlefield stalemates. Russia has been showing its frustration by threatening Ukraine’s allies and supporters. I don’t believe the market has priced in the possibility that Russia will escalate tensions into a full-blown war against all of Ukraine’s allies. If this were to happen, I imagine there would be a significant hit to the markets as they tried to figure out how the war would impact earnings.
Third, the economy has been giving indications of an impending recession. While the Fed focuses on controlling inflation through interest rate hikes, its actions will likely trigger a recession. If a recession becomes deep, I expect the market to recoil. I don’t believe the market is anticipating anything more than a mild recession, so anything deeper may cause some waves.
Overall, I’m not too worried about where the market is right now. The price-to-earnings ratio (PE Ratio) of the S&P 500 is currently sitting around 22, which is slightly higher than its historical average over the past 30 years. I expect more volatility to come, so watch the market for good investment opportunities.
Happy investing! Ü
