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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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Book of Condolences for Pope Francis at Cathedral

  A Book of Condolences has been opened at St Mary’s Cathedral for those wishing to pay their respects following the death of Pope Francis. The Pope, who led the […]

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A Book of Condolences has been opened at St Mary’s Cathedral for those wishing to pay their respects following the death of Pope Francis.

The Pope, who led the Catholic Church for twelve years, died on Monday at the age of 88.

He had been suffering from double pneumonia in recent weeks, but his death still came as a shock to many. Just hours before his passing, he had been seen greeting crowds in St Peter’s Square during Easter Sunday celebrations.

Locally, Bishop Ray Browne has led the tributes. He described Pope Francis as “a gentle shepherd” who brought humility and compassion to his role.

“It was with great sadness that I learned of the death of our Holy Father Pope Francis,” Bishop Browne said. “From the moment he chose the name Francis, rooted in humility, he signalled a papacy of building peace, care for the poor, and love for all of God’s creation.”

The bishop also highlighted the Pope’s focus on protecting the planet and caring for the marginalised, calling him “a voice for the voiceless” and “a witness to the Gospel in word and deed.”

A special Mass in memory of Pope Francis was held at St Mary’s Cathedral on Wednesday.

The Pope’s funeral Mass will take place on Saturday at 10.00am in St Peter’s Square. It will be led by Cardinal Giovanni Battista Re, Dean of the College of Cardinals, and concelebrated by church leaders from around the world.

Due to the Pope’s passing, the special Mass for the canonisation of Blessed Carlo Acutis, which was due to take place this Sunday has been cancelled.

Mass will still take place at the usual time of 11.30am. A new date for the celebration will be announced in due course.

Blessed Carlo Acutis was due to be officially declared a saint in Rome on Sunda but that has been postponed.

Carlo Acutis had a deep devotion to St Francis of Assisi, and his final resting place is in Assisi, near the tombs of St Francis and St Clare.

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Con O’Leary: Killarney loses a vibrant and popular personality

Killarney Chamber of Tourism and Commerce has led the tributes to the late Con O’Leary, an extremely popular and very successful businessman in the town, who passed away in the […]

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Killarney Chamber of Tourism and Commerce has led the tributes to the late Con O’Leary, an extremely popular and very successful businessman in the town, who passed away in the early hours of Sunday.

Con was a vibrant and popular personality in Killarney where he operated The Laurels on Main Street, a thriving bar and restaurant, which he inherited following the passing of his father, Thado.
The business organisation said from a social perspective, The Laurels became the beating heart of the town and it was a landmark at the Market Cross in the same way as Clery’s clock was in the capital city.
Chamber said Con’s passing really marks the end of an era as he was one of a golden age of inspirational local business people who developed and built Killarney, through hard work, bravery and great commercial flair, and helped create the wonderful tourist attraction and holiday destination it is today.
“Con was very proud of Killarney and he played a very active part in progressing the town at many levels.
“He was a man that was never short of great ideas and his contribution to the business life of the town and as a director of Killarney Race Company was immense,” Chamber said.
“He was ahead of his time in many respects with the introduction by what became known as “the singing lounge” many years ago and The Laurels always led by example through its successes in the annual Killarney Looking Good competition”.
The business representative organisation noted that the O’Leary family has always been very supporting of the town and Con’s daughter, Kate, was a very dynamic Chamber President and is still a very valued member of the executive.
Chamber expressed deep sympathy to Con’s wife, Anne, children Kate, Niall, Tara and Lorna, sons-in-law, grandchildren, sisters, relatives and friends as well as the dedicated staff in The Laurels, past and present, who Con always had great time for and a great rapport with.

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