How about that stock market? Disclosure: I’m writing this article in June. At the end of 2021, we set out our projections for the stock market in 2022: 5,251 for the S&P 500 and 40,000 for the Dow. Those projections were based on our expectations for both profit growth in 2022 and the yield on the 10-year Treasury. At that time, given interest rates, the US stock market was still under our estimate of fair value. That is no longer true. Given the surge in long-term interest rates in 2022, the US stock market was now fairly valued for the first time in over a dozen years, dating back to the panic in 2008. During many of these past twelve years, with the US stock market well under fair value year after year, we often lifted our year-end forecast. But here we are in early June, and a vicious sell-off in the bond market has pushed the 10-year yield to 3.1%, much higher than the end of last year and above our 2.5% estimate. This higher yield makes a world of difference in how our model sees the stock market. Based on corporate earnings, we see the stock market as undervalued by roughly 20%. We think the outlook through year-end suggests a larger gain than normal when stocks are at fair value. First, some investors are already pricing in a recession for this year or early 2023. But we don’t see a recession starting that soon. As the most pessimistic investors realize they were wrong, that adjustment should drive equities upward. It’s a classic wall of worry that can help boost stocks, with bad news in the near term, already over-priced. All polls out there are signaling that there will be a red wave in November. This is not to say Republican wins are always good for equities; they’re not, far from it. In the current political situation, a Republican Congress creates a divided government where the odds of tax hikes would be dead. In addition, the judicial branch is taking a tougher line on federal regulations.

Put it all together, and we think there’s a recipe for an equity rally into year-end, with the S&P 500 ending the year at 4,900 and the Dow at 39,000. However,  assuming some modest increases in interest rates from here, such a rally would also put the stock market in overvalued territory. So, the rally we’re projecting would be something for equity investors to enjoy but not a reason to become complacent. This means that you can’t just “set it and forget it,” as Ron Popeil used to say in his infomercials. Instead, you or an advisor that you trust, preferably a fiduciary, like we are, should be actively managing your assets to take advantage of the market’s upward movement and weather the storms of the downward trends.

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