Are markets poised for improvement? An investment pro weighs in

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A Breadth of Fresh Air?

After suffering a painful September (S&P 500 -9.3%), October’s month-to-date performance of +3.1% feels pretty spectacular. At the time of this writing, the S&P strung together three days in a row of advances for a week-to-date return of +3.1%, causing many to ask themselves: “Is this the first week of the rest of our lives?” OK, maybe that’s overly dramatic. But investors are at least asking whether this recent rally has staying power and what we can look at as a guide?

Many look at breadth indicators, which measure how much participation there is in market movements, to determine how strong or weak those trends may be. The most common breadth indicator measures the number of stocks that are advancing and declining on a particular day. In a rally, you want to see broad participation in the upswing to show that buyers are spreading the wealth (pun intended) across multiple stocks, sectors, and industry groups — rather than just a couple big stocks or sectors that can mask weakness elsewhere.

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The chart below looks at the ratio of the two (number of stocks advancing / number of stocks declining) and is a bit noisy, but hang with me. In an effort to find outliers, or possible signals of notable strength, we drew lines at +3 standard deviations and +5 standard deviations above the average.

NYSE Advance/Decline Ratio

Good news: we hit an extreme of +5 standard deviations on Oct 4th. Bad news: that’s not necessarily predictive of positive forward stock market returns. For example, on Oct 13, 2008 this ratio was just as high, and the S&P dropped 13% in the following three months. On Dec 16, 2008 this ratio was again at +5 standard deviations, and the S&P dropped 17% in the following three months…on the heels of a Fed rate cut, to the lowest rate ever (0%).

In Animal Spirits we Mustn’t Trust

Animal spirits in investing refer to the power of herd mentality, and the tendency for investors to be overtaken by the “spirit” of the moment regardless of whether it makes rational sense or not. The rise of stocks during the dot-com bubble is an example of this. As are some of the extreme stock market crashes that have occurred, one of which we just saw the 35th anniversary of, the crash of October 19, 1987 when the Dow Jones Industrial Average plummeted 23% in a single day.

But there will always be outliers, and this chart shows a slightly more rosy picture. Since mid-2004, the advance/decline ratio has hit +5 standard deviations 32 times. Below is the distribution of 3-month forward returns on the S&P. Not always positive, but many of them are.

3-Month S&P 500 Returns

That’s when you have to take the environment into account and know the risks that still lie ahead. Animal spirits can be powerful, and they occur in both bull and bear markets. Bear market rallies can also be powerful. We can’t trust either as durable signals, and so far, we don’t have a clear sign that this recent rally is anything different.

(Cue the critics who will call me negative Nancy, or my personal favorite, “Lower Liz.”)

Here’s the thing—the sooner we get to extreme pessimism, the sooner we move through the cycle and restart. With inflation still as high as it is, earnings that have barely budged lower, and a market P/E sitting around its 15-year average, it’s hard to convince me that we’ve hit extreme levels of cynicism.

Pounce When Ready

But you’re not going to catch the bottom and neither am I, nor will I even try. We’re closer to the end than we are to the beginning, and the more bear market rallies we see, the fewer are left before we finally flush it all out. This earnings season and next could be pivotal points in the cycle when companies clear out the dirt and set realistic expectations for 2023. Economic data could weaken further into the end of the year and start to take care of inflation. Still some more things to check off the list, but if/when earnings crack and just before economic data falls into contraction conditions, is when you start to pounce on market opportunities. That could be just around the corner.

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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.


Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Advisor
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at SoFi.

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9 smart investments to hedge against inflation

9 smart investments to hedge against inflation

It’s no secret that inflation has arrived and is here to stay. To protect yourself from the adverse effects of inflation, it’s essential to invest your money in smart ways. 

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A few things can cause inflation, but the most common is when the government prints more money than there is demand for. Printing more money causes the value of each dollar to go down, and it becomes more expensive to buy goods and services.

CasPhotography/istock

Inflation can have a lot of adverse effects on the economy. When the value of money goes down, people tend to hold onto their cash instead of spending it.

Not spending money can lead to a decrease in demand, which can cause businesses to lay off workers or even go out of business.

Yingko/istock

Inflation can also affect asset values. A decrease in the value of money can lead to a decrease in the value of these assets. For example, when the value of money goes down, it can be more expensive to buy stocks and other investments.

marchmeena29 / istockphoto

There are a few things you can do to protect yourself from inflation. One is to invest your money in assets that will maintain their value over time. Another is to keep up with current events and make sure you know how inflation affects the economy. Finally, make sure you’re not taking on too much debt, as inflation affects this.

Here are nine investments that can help you protect your savings from inflation.

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TIPS, or Treasury Inflation-Protected Securities, are a type of bond issued by the U.S. government. The value of these bonds increases as inflation rises, so they can be a great way to protect your money from the harmful effects of inflation.

The downside of investing in TIPS is that they tend to have a low yield, so that you won’t earn a lot of money on your investment. However, the security of knowing your investment is protected from inflation makes them a wise choice for anyone looking to shield their money from rising prices.

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Bonds are another investment that can help you protect yourself from inflation.

 Bonds can be a great way to make sure your money is safe and will maintain its value even if inflation rises. When you buy a bond, you’re lending money to a government or company in exchange for regular interest payments over a set period of time.

The downside of investing in bonds is that they can be risky if the company or government you’ve lent money to goes bankrupt. So, it’s essential to do your research before investing in bonds and know exactly to whom you’re lending money.

DepositPhotos.com

Gold is a popular investment during times of inflation, as it tends to hold its value even when the dollar falls. The preservation of its value makes gold an excellent option for anyone looking to protect their money from price fluctuations.

The downside of investing in gold is that it can be expensive, and there’s no guarantee that the price will go up over time. So, it’s essential to do your research before buying gold and make sure you’re comfortable with the risks involved.

DepositPhotos.com

Real estate is another asset that often performs well during times of inflation. When prices rise, people tend to invest in real estate to earn a higher return on their investment. The earning potential can make real estate a wise choice for anyone looking to shield their money from inflation.

The downside of investing in real estate is that it can be risky, and it can take a long time to see a return on your investment. So, it’s essential to do your research before buying property and make sure you’re comfortable with the risks involved.

DepositPhotos.com

Commodities are items like gold, silver, oil and wheat used as investments during times of inflation. They are used as investments because they tend to hold their value even when the dollar falls.

The downside of investing in commodities is that they can be volatile, and it’s difficult to predict how prices will change over time. So, it’s essential to do your research before buying commodities and make sure you’re comfortable with the risks involved.

NiseriN / iStock

Mutual funds are a type of investment that allows you to invest in various assets, including stocks, bonds, and commodities. Mutual funds can be a great way to spread your risk and protect your money from the adverse effects of inflation.

The downside of investing in mutual funds is that they can be expensive, and it can take a while to see a return on your investment. So, it’s essential to do your research before buying into a mutual fund and make sure you’re comfortable with the risks involved.

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Stocks are another option for protecting yourself from inflation. When you buy stocks, you’re investing in shares of a company. Investing in these shares means that you become part-owner of the company and stand to earn dividends if the company does well.

The downside of investing in stocks is that they can be risky, and it’s difficult to predict how prices will change over time. So, it’s essential to do your research before buying into stock and make sure you’re comfortable with the risks involved.

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Silver is a type of commodity that often performs well during times of inflation. Silver performs well because it tends to hold its value even when the dollar falls.

The downside of investing in silver is that it can be volatile, and it’s difficult to predict how prices will change over time. So, it’s essential to do your research before buying into silver and make sure you’re comfortable with the risks involved.

alexis84 / istockphoto

Floating-rate bonds are a type of bond that has a variable interest rate. Having a variable interest rate means that the interest rate will change depending on how the economy is doing.

The upside of investing in floating-rate bonds is that they offer a higher return than regular bonds and are less risky than stocks or commodities.

The downside of investing in floating-rate bonds is that they can be volatile, and it’s difficult to predict how prices will change over time. So, it’s essential to do your research before buying into a floating-rate bond and make sure you’re comfortable with the risks involved.

JJ Gouin / istockphoto

Inflation can be a severe threat to your financial security. However, by investing in the right assets, you can protect yourself from its adverse effects. So, before you invest your money, make sure you understand how inflation can impact your portfolio and choose investments that will help you stay ahead of the curve.

This article originally appeared on MaxMyMoney.org and was syndicated by MediaFeed.org.

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