Investors: Beware the Slope of Hope?

There are so many great sayings in the investment world. But the one that seems most apt right now is...

The Market Climbs a Wall of Worry.  

That was most certainly the case as stocks bounced from as low as 4,800 back in early April to make all time highs around 6,200 in the past week. This happened all the while we dealt with the uncertainties of tariffs...inflation...recession...and most recently the US bombing Iran.

Now let’s remember that the flip side of this coin is that...Stocks Slide Down the Slope of Hope.

Meaning that we should not get so enamored with recent gains as to forget the things that could derail the market down the line.   

We will talk more about that in the July commentary that follows. 

Market Commentary

We have already climbed the wall of worry. And probably have a bit more to go on this current bull run.

However, the focus of this month’s commentary is to remember the other side of the coin “Stocks Slide Down the Slope of Hope”.

Meaning that often when things seem the best is when stocks start to heading south.

Think of it like a see saw. If everyone is on the bullish side, then the market is likely out of balance where investors bid up stocks to the point of perfection. This myopic view of only the good news sets up stocks for failure when there could be some serious downsides on the horizon.

No...this is not a bear market call. Far from it.

The average bull market lasts 63 months and we are only at month 33 on this run. So, there should be plenty of time on the clock given the way things typically play out.

Yet, there is nothing cookie cutter about bull markets...nor bears...nor stiff corrections.

So even in the midst of times where we are feeling quite good about things, it is wise to do an accounting of all the potential hazards on the horizon so we can react if threats grow louder.

In this case I see 2 possible threats that deserve our attention. Both are related to tariffs.

Threat 1 = Inflation

This is not the first time you’ve heard that tariffs are inflationary. Or simply a tax on US citizens as sellers of the foreign products pass along the increased cost of the tariff onto the purchaser.

The Fed has stated emphatically that they are happy sitting on their hands with rates right now to see how tariffs play out. Because if they prove inflationary, then they are perhaps more likely to raise rates which would most certainly be a negative for stocks.  

This inflationary tax on citizens would be somewhat mitigated by the looming tax cuts on the way. But until things are finalized then we really don’t know how it will play out. Thus, we will watch closely.

Threat 2 = Future Recession

Glaldy after the anemic -0.3% showing for US GDP in Q1 it has ramped up to a more normal outcome. As of today, the GDPNow model puts Q2 GDP at a much healthier +2.5% clip.

The ugly underbelly of the above GDP story could be what economist call a “pull forward of demand”.

In this case, if you are afraid the cost of things you want later this year will be much higher because of tariffs, then you are more likely to buy it now.

Meaning future demand is pulled forward which creates artificially higher GDP readings in the current quarter followed by lower readings in the future (because some of the future buying may have already taken place).

Another term for this is a recessionary cliff (where demand falls off the cliff).

Right now, I put fairly low odds on this being true. But the steeper final tariff terms are...the more likely a future recession could take shape which goes hand in hand with bear market. This deserves our attention down the line.

The Path Forward

Right now, the bulls are rightfully in charge. That’s because with GDP expanding and tariffs likely to be more moderate than first advertised, then continuation of the bull market makes the most sense.

So our investment plan is to continue to lean bullish with a mix of the fundamentally healthiest stocks as pointed out by the Zen Ratings model.

However, I don’t believe the current bull run has much more legs. Maybe a near term top of 6,300 before we settle into a range for a while. And maybe a high of 6,500 by years end.

I just don’t see that much more upside when PE for large caps are once again back to 22 which is on the high side of normal.

Gladly small and mid-caps as a group are more reasonably in the 15-16 PE range which offers more upside potential.

Our portfolio definitely skews towards the latter group given what I see as the much better value proposition. Recent market action says others may be on board for this sector rotation as well.

For example, how Tuesday the S&P 500 was close to breakeven while the small caps in the Russell 2000 were having a Mardi Gras parade (our portfolio flashed quite well leading to more profitable beads being put around our neck ;-)

What To Do Next?

Discover the Zen Investor service that relies upon my 45 years of investing experience. 

During that time I have learned vital lessons from 7 bear markets…8 bull markets and just about everything else the “Mr. Market” can throw at us. 

I use this knowledge to create a detailed investment plan. Then lean into our proven Zen Ratings quant model to select the best stocks given their average annual return of +32.52%. 

In total the Zen Investor portfolio now has 20 top stocks that are hand picked for today’s unique market landscape.  

That includes 2 new stocks added in early July with stellar upside potential. 

If you are curious to learn more, and want to see my current top stocks, then please click the link below to get started now. 

Discover the Zen Investor & Top 20 Stocks >

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)

Editor of the Zen Investor

What to Do Next?

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