First let me start off by saying that I think I have the greatest clients in the world. Because we go over risk tolerance at our meetings, you seem to understand that your investments are in for the long haul. That’s why we choose our risk. We always want to make sure we can sit through the volatility and not panic sell when the market is down. I very much appreciate that about you. I’ve heard regret from those that sold off their portfolios in the 2000s, 2008-09, and during the Covid drop of 2020.
We closed the third quarter on a solemn note. The DJIA officially joined the S&P500 in bear market territory the last week of the month. The S&P500 also found a new closing low in its own bear market. Recently, Goldman Sachs reduced their price target for the S&P500 as noted here, which is much different than JP Morgan’s target. Like I mentioned in my last article here, let’s hope JPMorgan’s prediction is right! Now if a couple of the biggest banks in the world wildly disagree on the near future of the market, especially because they have entire divisions dedicated to these types of predictions with billions of dollars on the line, how could we possibly make sense of it? That is probably the best reason I can give for sticking with your long-term plan for investing.
The interesting thing about a bear market is that many people seem to think we will never dig out of it. The graphic above shows the timeframe and depth it has taken for recovery. I think it helps remind us all that this has happened plenty of times before with an upside that has always come around. If the chart above looks overwhelming to you, here’s the takeaway: On average the bear market lasted 11 months with a 30% decline and took 19 months to fully recover. Our current bear market started on January 3rd of 2022. We are now nine months into it with about a 24% decline in the S&P500. I’d love to beat the average length of time we are in this!
September’s reputation as historically the worst month of the year lived up to its expectations. On Tuesday the 13th, the S&P500 dropped over 4% in one day—our worst day since June 2020. What was the catalyst for that day you might ask? The answer is inflation data and the Federal Reserve’s expected response, of course. It’s been the theme for over a year now. The general consensus was for inflation to moderate much more than it did as noted here. It seems now that we have already passed our peak for inflation, but the next question is how long will this current inflation last? If we don’t start seeing a bigger downward trend in the inflation data, we’ll keep seeing our investments stick around this level. Over the next couple months, I’m expecting the Fed to have raised interest rates enough to counteract high inflation so we can get back down to the Fed’s target of about 2% inflation, not the >8% level where we are currently sitting.
The economy right now seems to be a mind filled with mixed emotions as noted here. On one hand, unemployment levels remain low and worker demand is still high. On the other hand, if the Fed raises rates too quickly, it could lead to a high interest rate environment that pushes consumers into a savings mode that hurts corporate earnings. The Fed’s Reserve Chair, Jerome Powell, is dead set on doing whatever it takes to tame inflation, even if it means bringing pain to households across the US as noted here and here.
If you’re new or just trying to understand how all this works, let me try to briefly explain a bit. We are currently in this very odd news cycle of good news is bad news. The good news of low unemployment and better than expected corporate earnings means the Fed continually raises interest rates to fend off an economy that is too hot. The Fed tries to combat an economic system that it feels is expanding too quickly by trying to hurt the expansion with raising interest rates. Consumers and businesses can’t borrow as much as they did when rates were lower. This reduces buying power, which reduces sales for products. When sales are down, many times companies will need to account for the lower income by attempting to make goods using cheaper inputs, raising prices, or reducing headcount like FedEx is forced to do as noted here, etc. All these variables make for an extremely choppy and volatile economic system. With still over 10 million jobs available, and with low unemployment, that side of the equation is difficult to manage. So, the Fed keeps raising interest rates until it hurts enough to turn the tide. If they raise too high and too fast, the economy will completely stall and throw us into a long-term recession that will be much harder to dig out from. Then they will end up lowering rates to spur growth and so the cycle continues.
This is why all of our accounts are so choppy…up and down, up and down (way more down) this year. Investors are trying to see if the Fed will get this right. I’m still optimistic that they do. My greatest hope is that they get this done by the end of the year so the markets can “renormalize”. What I mean by that is so markets can rely on interest rate stability for many years. Then corporations can invest in themselves with confidence. Consumers will also be able to take loans at predictable interest rates. With much needed stability, the markets should get back to a nice, slow growth pattern that lets us rest a bit easier.
When we are in one of these bear market cycles, you may want to consider whether you should increase your investments. This can create an upside opportunity for those that do so during these stressful times. If you are thinking about it, there are a few ways to try to take advantage of a down market. 1) You can increase your 401k contributions (if you’re still working). 2) You can make deposits to your IRA. 3) Cash sitting in savings can be invested to an individual or joint account. These options are not for everyone, but if you’re being pulled in that direction, just let me know. I’ll be happy to help decide if one of these options is right for your particular situation.
Cheers to a wonderful Fall and have a Happy Halloween!!!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All investing involves risks, including the loss of principal.