This has been one of the most challenging markets for both stocks and bonds that I have ever seen! Never during my investment career have both stocks and bonds lost so much on a combined basis in the same year. In other words, bonds usually act as a safety net for equities, but not this year.
Even though equity losses are quite contained, overall investor sentiment seems worse because of those bond portfolio losses. Throw into the mix the extreme losses on crypto assets and the general feeling that we are headed for a recession and it’s no wonder that the average American is feeling down about their financial futures.
However, just like investing is for the long haul, so is staying rooted in the bigger picture. Markets move up and down and always have. Some years are better than others. Some years are just plain painful! However, time generally heals all wounds and allows us to achieve our larger goals.
The key is to keep focused on the prize and that is your personal financial goals or the big picture.
I could go on and on. Whatever the goal, that should be your focus.
You should be making progress towards the goal and course correcting along the way. A bear market, like the one we are currently in, can set you back in the short-term, but hopefully your plan was built on longer-term assumptions.
Here are five things you might want to examine to make sure you are still achieving your big picture goals:
If you are like most Americans, you probably have not revisited your plan in some time. It is like all things in life, you must revisit it from time to time to see how you are doing in moving towards the big picture goals.
If you need help with the process or maybe you haven’t ever even developed a plan, please feel free to give us a call or click here to reach out to us.
You would not know it from our portfolio positioning, but we believe the markets could bounce higher into the holidays.
Why do we believe this?
Market participants are too bearish on the equity markets.
When sentiment gets this negative (see AAIA chart of Bearish Sentiment below), Mrs. Market tends to do what it needs to do to fool the largest number of market participants. In this case, that would be a significant market bounce.
You can see that negative sentiment has never been this high in the twenty years that this survey has been taken by AAII.
You can also see below that this pegs those investors in the Greedy camp, which is a dangerous place to be!
Courtesy of the American Association of Individual Investors.
This means too many traders/investors are on the same side of the trade. There must be bulls and bears in roughly equal numbers to have a market. Risk shifts to extremes when that balance shifts to one side or the other (i.e., too many bears or too many bulls).
I have to admit we are part of the traders on the same side of the boat just because the market seems unable to find solid footing for a sustained rally that would justify a shift in positioning. We are now trading at or below the June lows and we speculate that there may be another 3% to 4% downside until we potentially find an areas of support.
Again, this is just a guess at this point, but we believe a rally, like the June rally is possible into the seasonally strong months starting in mid-October through December. If that is the case, we will have to do some quick repositioning when that reversal does come to participate in that bear market rally.
Note, we are not saying the bear market is over, just that it is due for a rally that wipes out excess bearishness and probably brings excess bullishness in its place, just like at the August top.
Good luck out there!
Let us know if we can help you ride out these difficult markets and economic times with either better financial planning or better investment management solutions.
I did a mid-month market update for clients (and select prospects) where I made the case that the rally we have seen in July and the first half of August was doomed to fail and was purely a “rip your face off” Bear Market rally.
Unbelievably, the bulls kept pushing the markets higher trying to front run the Fed. They were not rewarded as the Fed’s focus remains on taming inflation. Fed Chair Powell put the markets in their place in a rather short and pithy, eight- minute speech from the Jackson Hole Summit. The markets tanked, thereafter, with the Dow Jones Industrial Average down more than 1,000 points on the day dispatching the bulls and sending them home licking their wounds.
So where do we go from here and what is your best course of action?
So far in 2022 the peak to trough decline through June was -24.5% for the S&P 500 Index. We have since gained about 60% of that back in July and August. As a next step, it would make sense to me that we should at least retest the June lows. It doesn’t mean we will, but that would be an absolute in my mind if I was pulling the levers of the markets.
Historically, speaking a -24.5% Bear Market decline would be the smallest of the past 100 years of Bear Markets. It is possible, but given all the intervention, quantitative easing and zero bound interest rates of the past decade, is a decline of -24.5% really what you would expect? I personally am looking for at least the average decline of the past 100 years (or roughly -35%), if not much more.
The market declines much faster than the time required to push it higher, but it is still a process. This means we will have bounces along the way lower in a Bear Market, like the July/August bounce. Over the past two Bear Markets, we had at least 7 bounces that retraced 50-70% of the prior decline. There will likely be many such bounces (both large and small) on the way to the ultimate market bottom. We also believe a retest of the recent June lows seems probable and then the market will likely spend some time testing that level.
We believe we take out those lows, but that is just a guess at this point. One thing I am certain is that the markets will be more volatile and will ebb and flow in whatever direction the market is trending at the moment, which at this point is down. It is highly unlikely that we will just grind higher (or lower) like we have seen over the past decade when the Fed was providing the markets with ample liquidity. In fact, the Fed is removing liquidity from the markets which means they are more likely to grind lower than the higher.
It will be very important in the decade to come to have a steady hand on the rudder of your investments to navigate through the coming storms including rising rates, inflation, supply chain constraints, the redevelopment of key manufacturing capabilities here at home, demographic changes and more that we just have just not seen over the past 75 years of U.S. protected global trade.
So now that I side stepped, going too far with my market forecast, let’s discuss the actions you can take to assure you prosper now and, in the future, to come.
First, you need the right advisor. One that excels at protecting and growing capital in tough markets and one that can assist you in planning for such contingencies so that you reach your financial goals. Of course, we are biased, but we believe we are such a shop.
Second, cash is King. It has been unfashionable to hold cash over the past decade or more, but right now cash is your best bet as an asset class as we enter a recession here and abroad. Hold whatever makes you feel comfortable right now and sleep well at night! However, be prepared also to deploy it at the right time. Don’t be lulled to sleep holding cash for the long-term as it is still likely to earn you less than the rate of inflation, which means it is losing purchasing power.
Third, the absolutes of the past decade are now gone. No one really knows when the markets will bottom or if it is really a bottom until some time has passed. Therefore, you need to resort to some tried and true methods to both deploy and protect your capital. I wrote a post in May 2022 on Dollar Cost Averaging in Tough Markets. This is one such method to manage risk while also not guessing at market bottoms. Get used to averaging into and out of markets in the years to come. They will be more uncertain!
Third, you need to be more diversified. The days of the 60% equity and 40% bond portfolio are behind us. Care to guess the top performing sector for the year? You guessed it? Energy.
After years of underperformance, energy is now only 4.78% of the S&P 500 Index vs 28% of the S&P 500 in 1998. This means a passive equity fund plus bonds gives you only limited exposure to the top sector of 2022. With our clients, we have added alternatives allocations that include top sectors, commodities, currencies, metals, and liquidity trading managers. Bottom line, you need to diversify to broaden your exposure to both profit and protect capital in this kind of market.
Finally, seek out the cash flow generators. There is an old saying that a “Bird in hand is worth two in the bush.” That saying is very apropos today. We believe it is better to get paid cold hard cash than to wait on growth that may not materialize in the future. High dividend companies pay you today and they have more reasonable valuations vs. their growth stock peers. Guess what is the top paying dividend sector by percentage today? You guessed it energy.
Let us know if we can help you today.
Have a great Labor Day Weekend!