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Three reasons stocks will fall

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By Michael O’Connor, theislandinvestor.com

I can’t recall a time in my career when the outlook was so ‘uncertain'.

I write to clarify my thoughts on the market, but right now, the market noise is deafening.

For me, the economic data points to an obvious slowdown, so my head screams ‘LIMITED UPSIDE’, but my pocket tells me I have been wrong plenty of times before.

Here are three areas I am watching that will dictate where the market goes over the coming months and how you can set up your portfolio accordingly.

1. There is an alternative

Bonds have become a genuine alternative to stocks as the equity risk premium falls.

This is already playing out. More than $100bn has flowed out of stock mutual funds and ETFs on a combined basis over the past 13 weeks, one of the worst flow collapses on record while money market fund flows surge.

The narrative is simple. Why have all your exposure in ‘risky’ stocks if you can get 5% risk-free?

2. Earnings

Company earnings drive the stock market in the long run, and higher interest rates will squeeze margins and lower corporate profits over time.

- In Q4, S&P 500 companies posted an average earnings decline of 4.9% over the same quarter a year earlier. This marks the first quarterly decline since the third quarter of 2020.
- S&P 500 profit margin fell from 13.4% in Q4 2021 to 10.8% in Q4 2022.
- Forward earnings projections have fallen from +10% to +2% over recent weeks - a trend that will likely continue, (some of this is already priced in).

As company profits fall, the price investors are willing to pay to own a part of these companies falls as well.

3. Real Estate slowdown

In the US, 'existing-home sales' have been falling for 12 months straight. January year-over-year sales were down 36.9% and are now at levels last seen during the COVID low and Great Financial Crisis.

Even with supply constraints, housing affordability is far from where it needs to be for demand to return. We need to see either a big adjustment lower in interest rates, a realistic decline in prices or some combination of the two.

In Ireland, the trend is still developing. Europe is behind the US in the rate hiking cycle, so mortgage rates are still relatively low (but rising). The housing market has remained stable as a result.

There have been some signs of a slowdown in activity but no significant price movement. The number of house sales in January 2023 was 11% lower than the same month a year earlier.

However, supply issues and a lower mortgage rate relative to the US mean we are unlikely to see any significant price declines in Ireland just yet.

As rates increase, however, I expect the Irish market to come under the same pressure we are currently seeing play out in the US.

Outlook

As we move forward, the question that determines where the stock market will go changes from:

How high will interest rates go?

to

How long can rates stay this high before something breaks?

In my opinion, any market rallies we see off the back of single data releases will be short-lived - but they will happen.

Long-lasting bull markets require rapidly expanding valuations and/or strong earnings growth. I don’t see a reason for either in the data.

Of course, this is a condensed view. If you want me to help you build out and protect your portfolio, email me mike@theislandinvestor.com or scan the QR code.

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Ring of Beara Cycle launches school programme

The Ring of Beara Cycle is for kids too! As part of its commitment to make a positive impact on the local community, the Ring of Beara Cycle are proud […]

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The Ring of Beara Cycle is for kids too! As part of its commitment to make a positive impact on the local community, the Ring of Beara Cycle are proud to continue to with two great initiatives: its Kids’ Cycle and its sponsorship of the School Cycle Safety Programme.

The Ring of Beara Cycle will take place on May 25 with over 4,000 cyclists taking part. The event starts and finishes in Kenmare town, Co Kerry to complete either a 110km or 140km route encompassing the magnificent mountains, valleys and the rugged coastline of the Beara Peninsula.

Kids’ Cycle
Adults are not the only ones getting on their bikes on May 25 for the Ring of Beara Cycle. The event also has its very own cycle for children around the town of Kenmare. Not only does this give kids a chance to join in the days’ activities with their parents, but it’s free and a great way for kids to get outdoors and exercise in a fun and safe environment.
Open to any child in national school between third and fifth class and following a 2km route around Kenmare and a slightly shorter route for tinier ones, registration is from 9.15am in Kenmare town square. Parents and guardians are welcome to cycle with their children. All participants should bring and wear a safety helmet for the cycle.
School Cycle Safety Programme
Another community initiative from the Ring of Beara Cycle is the Cycle Right Programme, working with local schools to get kids’ up to speed on road safety and cycle best practices.
The Ring of Beara Cycle is working with Cycle Sense and Wheely Good Cycling Academy to deliver this 4-week programme to local schools in and around Kenmare and the Beara Peninsula.
Some 250 students across 8 schools are participating in this initiative, and the schools involved are: St John’s National School, Realt Na Mara National School , Lauragh National School and Tulloha National School in Kenmare, and on the Beara Peninsula: Scoil Chaitigheirn in Eyeries, Oir Cheann iNational School in Eyeries, Cahermore National School in Allihies, Scoil An Croi Ro Naofa in Castletownbere, Mhichil Naofa in Castletownbere, Adrigole N S in Bantry, and Trafrask Mixed N S in Ardrigole.
This initiative is normally paid for by the schools themselves but is now free for all the children taking part thanks to a generous donation by the Ring of Beara Cycle Committee that covers the cost of delivering the programme to these schools.
Cycle Right is the National Standard for Cycle Training and provides practical cycle safety and skills training through Department of Transport, the Road Safety Authority and Cycling Ireland. The aim of the programme is to promote cycle confidence on the road in increasingly complex scenarios delivered by qualified, registered trainers.
No stranger to giving back to the local community, not only does the Ring of Beara Cycle make a significant, positive impact on the local economy, it also encourages kids to enjoy themselves on their bikes and to do this safely with confidence.

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Browne’s Agri Open Day is a must-attend event

Browne’s Agri Open Day is always one that was marked in  Agri calendars as a ‘must-attend event’. This year’s event is taking place on Wednesday May 22 on their site […]

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Browne’s Agri Open Day is always one that was marked in  Agri calendars as a ‘must-attend event’.

This year’s event is taking place on Wednesday May 22 on their site in Castleisland.

The event was always renowned for getting great advice on the Agri topics of the day as well as a window into modern developments taking place in all aspect of Agriculture and country living.

The extending of the yard area will allow more space to be given over to even more exhibitors, ensuring all areas of agriculture, and rural life will be showcased on the 22.

There will be experts on hand to advise on Calf Rearing, Grassland management, Weed control, Drainage, Fencing , Shed and Yard Layouts as well as bee keeping, and helpful health advice.

“As well as the great advice, you will be ensured of great deals, great food, great craic and free entry to the many spot prizes that will be available on the day,” said general manager Denis O’Connor.

“All that is asked is your attendance and if at all possible, to make a small contribution to our chosen charity Pieta House.”

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