Mitch on the Markets

May 6th, 2024

The “Wall Of Worry” Is Growing Again

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The Wall of Worry is Growing Again

A string of recent U.S. economic data has many investors worried.

Earlier in April, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI) measure of inflation rose 3.5% year-over-year in March, which marked a fairly substantial increase from February’s 3.2% print. Hotter-than-expected inflation is not what investors, consumers, or the Fed want.

To be fair, the Federal Reserve prefers the PCE price index measure of inflation, which gives significantly less weight to shelter costs. But that measure of inflation also came in higher-than-expected in March, with a 2.7% year-over-year increase marking a step-up from February’s 2.5% print.

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Market downturns can and will occur, but what should you do?
• How can diversification help you manage volatility without compromising your returns?
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Download Zacks Volatility Guide, “Helping You Manage Market Volatility.”1

A major dialing-back of rate cut expectations ensued. Investors started the year hopeful that the Federal Reserve was going to lower the benchmark fed funds rate multiple times, with about 150 basis points of total cuts anticipated for 2024. By last week, however, the market was only anticipating about 35 basis points of cuts, with none expected this summer or fall.

While inflation, and by extension, rate cuts, seemingly moved in the wrong direction in Q1 2024, the U.S. economy also slowed. The Bureau of Economic Analysis (BEA) reported that the U.S. economy expanded just 1.6% in Q1, which is the slowest pace in nearly two years and was notably below most economists’ expectations.

Put rising inflation and slowing economic growth together, and it’s easy to leap to “stagflation” being muttered in financial media and amongst investors. What’s more, investors are also aware that crude oil prices have been rising, geopolitical tensions in the Middle East and Russia/Ukraine have risen in temperature, and the U.S. presidential election looms large.

Measures of U.S. consumer sentiment, like the University of Michigan survey below, have been improving in recent months. But it’s important to note that sentiment is improving from very low levels in 2022, when many Americans felt as bad about the economy as they did during the depths of the 2008 Global Financial Crisis.

Consumer Sentiment is Still Below What We’d Expect During a Sustained Expansion

Source: Federal Reserve Bank of St. Louis2

‘Worrisome’ economic data, combined with sour sentiment, signals to me that the wall of worry remains firmly intact. And I see that as a good thing for stocks. The reason I take a constructive view here is that jobs, consumer spending, and corporate earnings remain solidly positive.

Though the BEA’s “advance” estimate of Q1 2024 GDP growth showed a deceleration from 2023, we know from the report that inventories and trade provided a notable drag. If we look at growth through the lens of consumer spending and business investment – known as Final Sales to Provide Domestic Purchasers – we find the U.S. economy posting a strong 3.1% pace of growth in Q1. Real consumer spending grew at a brisk 0.5% month-over-month pace in March.

Consumer Spending and Business Investment Show a Still-Healthy Economy

Source: Federal Reserve Bank of St. Louis3

Then there’s the U.S. corporate earnings picture, where Zacks sees an environment of steady improvement and resilience, with the earnings growth pace modestly accelerating and estimates for the coming periods starting to increase. Total earnings for the 139 S&P 500 members that have reported Q1 results (as I write) are up +4.6% from the same period last year on +3.4% higher revenues, with 78.4% beating EPS estimates and 59.7% beating revenue estimates. These are good numbers.

Looking at Q1 as a whole, the total S&P 500 earnings are now expected to be up +4.4% from the same period last year on +3.9% higher revenues, which follows the +6.8% earnings growth on +3.9% higher revenues in 2023 Q4. In my view, this data combined with consumer spending and jobs numbers points to a positive growth outlook, even as the wall of worry grows.

Bottom Line for Investors

There are times in the market when investors get too greedy, and times when investors get too fearful. I sense that the latter sentiment is more pervasive today, which arguably makes it an attractive time to buy. Growth decelerated in Q1, but it’s still solid. And inflation ticked slightly higher in February and March, but is a far cry from being unanchored or rising uncontrollably. Our base case that interest rates have peaked in this cycle remains intact.

These are all constructive views on the outlook for the U.S. economy, even as investors seem to grow more pessimistic about what the year ahead holds. In my opinion, that’s bullish.

It is important to remember that factors, such as inflation and volatility, are a normal part of the ebb and flow of the markets. I believe the key is not to look for ways to eliminate it, but to develop a mental approach to dealing with it.

Our Volatility guide, “Helping You Manage Market Volatility4,” will provide you with insights and tips to do just that. Get answers to questions like:

• Market downturns can and will occur, but what should you do?
• How can diversification help you manage volatility without compromising your returns?
• When volatility is too much for you to handle, how can a money manager help?
• Can volatility actually be an opportunity?

If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today!

Disclosure

1 ZIM may amend or rescind the guide “Helping You Manage Market Volatility” for any reason and at ZIM’s discretion.

2 Fred Economic Data. April 26, 2024. https://fred.stlouisfed.org/series/UMCSENT#

3 Fred Economic Data. April 25, 2025. https://fred.stlouisfed.org/series/LB0000031Q020SBEA

4 ZIM may amend or rescind the guide “Helping You Manage Market Volatility” for any reason and at ZIM’s discretion.


DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index is a modified market capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The MSCI ACWI ex U.S. Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the U.S. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell 2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The S&P Mid Cap 400 provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

The S&P 500 Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
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