It’s been a while since I wrote a post, time to change that.
I had to fire up the laptop because the market has something to say. “How do ya like me now?” In my article History Often Rhymes but Does Not Repeat? | FI Chronicles, I shared top factors leading to the -19.6% S&P 500 decline last year.
I’ll revisit those same factors and explore how they might be impacting the excellent S&P 500 return this year.
Russia Ukraine war
I’m not an expert on this conflict, but it’s still ongoing and doesn’t appear to be ending any time soon.
Inflation
When I last wrote about US inflation, it was 8-9% year over year. The latest August 2023 data show YoY inflation of 3.7%. What a difference a year can make. Inflation has slowed to a more normalized rate.
How does inflation look across different categories?
Although some items like gas have dropped significantly, a few key areas remain painfully high.
Food – Eating out and groceries have continued to increase over the last 12 months. I notice this every month.
Rent of primary residence – Rents have risen. 8% is no small amount. You can find other rent measure methodologies that show moderate rent increases for July 2023 YoY of .5%. I won’t get into different methodologies here, but I will show this graphic reiterating that personal finance is very personal. Often, it depends on your region, which is probably no more evident than in real estate.
If you are a homeowner who locked in a historically low 2-4% mortgage rate before 2022, you are in a much different situation than someone looking to buy a house today. The current homebuyer is seeing elevated pricing from 2021-2022. Prices are relatively flat this year but because interest rates have gone from 3% to 7%, average payments are way up.
The Federal Reserve has stated they want to crush inflation to 2% and will continue to use the only tool they have in their toolbox it seems – interest rates. When you have a hammer, everything looks like a nail. They have advised us to expect a couple more rate increases this year.
Stock Market
And now to the reason for choosing a Toby Keith song title for this post. The stock market has recovered nearly everything lost in 2022 and is on the doorstep of all-time highs again. Last year we looked at the fall of big tech. This was their YTD performance at the time I published the article in fall 2022.
And here they are YTD as of 9/8/23:
Big tech is back! They had a tough year in 2022, but these companies have restarted their march upward. Some might share concern for the S&P 500 over the meteoric rise of these Tech Titans, considering their large percentage of the S&P 500.
Here are the Top 10 components of the S&P 500 today:
And compared to historical pricing (as measured by their Price to Earnings ratios), they are expensive again:
What does all this mean to you and me? What are the takeaways?
War – I can’t control this, but I can use my right as an American to vote for leaders that I feel will guide this country appropriately.
Inflation – Although I can’t control the country’s overall inflation rate, I can influence our household’s inflation rate. Spend carefully on big-ticket items that our family values. For instance, on our last vehicle purchase, I spent a lot of time researching vehicles for one major factor – reliability. With our previous vehicle, I was constantly having to spend valuable time dropping this car off at the mechanic’s shop, inconveniencing our schedules and causing unexpected, expensive repairs. After thorough research, I determined a Toyota, although not the least expensive option on our list, should be the most reliable. This is a car we can hopefully drive for 10 years. Vehicle inflation impacts us less here by driving vehicles longer.
Investing – I have learned that I’m not a stock picker. I’ve tried with some mixed success and will likely always dabble with a small percentage of our overall portfolio. But I know that my best bet is just to keep buying the S&P 500 index every two weeks through automated investing. Choose Your Own Adventure here, but for our family, I’ve determined that to be the simplest and most efficient approach to wealth building.
By investing this way, you take advantage of great buying opportunities like the last 18 months. As things got worse in 2022, we kept buying. I wasn’t too concerned with the decline in stock prices. We bought shares of great companies at 30%-40% off. I will probably look back at those contributions as some of the best of this decade.
Who knows what the remainder of 2023 has in store for investors? But I’ll attempt to control what I can and let go of what I can’t. And old Mr. Market will keep on singing whatever song he pleases.