· Not surprisingly, stocks remain in this one-step forward, two-steps back pattern as selling emerged after the rally the prior week. This bottoming process should continue until valuations become too tempting to avoid or more likely, that the Fed speak becomes more dovish. Either way and as we have stated for quite some time, we do expect the volatility to continue throughout the remainder of the summer.
· Good riddance to the second quarter, a period during which all major indices fell double digits. For the first half, the S&P 500, NASDAQ Composite and U.S. Total Market Index have dropped more than 20%. However, it is important to note that, excluding dividends, the average annual return of the S&P 500 over the past three years is 8.77%, a period that encompasses both the COVID pandemic as well as the recent bear market. Yes, it does pay to think longer-term.
· Investors certainly know that there is a lot of uncertainty. Eventually, some of these uncertainties will sort themselves out, prices will have taken into consideration the uncertainties or investors will tire of the uncertainties and begin to focus on their long-term objectives rather than on the current market malaise. This is the human condition. Think of tragedies in our lives. Long-term optimism is replaced by a shorter-term self-absorbed focus which in time is once again replaced by that longer-term optimism. The bottom line is that eventually investors will begin to become less absorbed with the day-to-day negative price action of their portfolios and once again focus on the longer-term benefits of investing. As the fear subsides, so will the panic selling and the financial markets will settle down.
· Historical data provide a guide, a potential window to future events. Investors must keep in mind that after every bear market in the history of the United States, stocks have gone on to set new record highs. Furthermore, we have allocated your assets for these trying times as well as those that are more fruitful. Regardless of this it is important to keep in mind that ultimately markets such as this test the patience, faith and resolve of even the most seasoned investors.
· A component to traditional, longer-lasting bear markets is the emotional strain it places upon the investor. Just as bull markets place pressure on investors sitting on the sidelines, bear markets exert the same force on those that have money in the market. Should the market remain choppy as we believe it will at least throughout the summer, you can count on a steady drumbeat from talking heads questioning the validity of long-term investing. We have regularly noted that unlike recent pullbacks, the recovery from this one will most likely be more of a process rather than an event and would recommend our clients to ignore the short-term and focus on your long-term objectives.
· The Fed has become too important in regulating the economy. Hopefully, when this is over, we can get to a more normalized economy with less overt Fed intervention. Recessions are necessary as they bring back into balance supply and demand. In addition, vis a vis creative destruction, recessions revitalize the economy, positioning it for a new era of growth.
· In our opinion, generally speaking investors would be wise to assume the volatility risk of an equity such as JP Morgan which sports a $4.00/share annual dividend which equates to a yield of 3.51% based on its closing price of $114.05 this past Friday as compared to a 10-year U.S. Treasury Note which yields 2.89%.
· According to reports released Saturday, Tesla delivered 254,695 electric vehicles during Q2, a 26.56% increase y/y when it delivered 201,250. Company officials stated that sales of its popular EV would have been greater if it had not been for supply chain issues in China and in regard to the War in Ukraine.
· The yield on U.S. Treasuries continues to fall, most likely indicating either a peaking of inflation or a future slowdown in economic growth, perhaps engineered by a Fed that doesn’t know when enough is enough. Most noticeable, the yields on the two, five and ten-year notes have fallen to 2.84%, 2.89% and 2.89% from 3.17%, 3.34% and 3.25% within the past two weeks. It is our belief that the global equity markets will most likely continue to be held hostage by interest rate volatility – in either direction.
· At the current time, there is room as well as the necessity for both tactical as well as strategic investing in one’s portfolio, even for long-term investors. The former being quite active, driven by fundamental analysis with purchases or sales confirmed by technical analysis while the latter being much more passive. As predominantly strategic investors, we will work hard to better inform our clients of the need for more tactical investing and work on better executing this discipline.
· The financial markets (especially the stock market) rise on fundamentals, but fall on technicals. Currently, technical analysis which identifies trends or patterns in an underlying security, industry, etc… rules the day.
· Can we blame at least some of the volatility on the fact that this is a Mid-Term Election Year? Quite possibly as according to statistics gathered by U.S. Bank and published on March 4, 2022, the average return of the S&P 500 during the year of the midterm through October 31 was 0.3%. During non-midterm years the rate of return averaged 10.7%. Furthermore, from November 1 of the midterm year through October 31 of the following year the S&P 500 rose by an average of 16.3%. As an aside, please note that during each of the 16 periods following the midterms noted above, the S&P 500 was always higher.
· An Important Note Regarding the Table Titled, “Select Sector SPDR Exchange Traded Funds (ETFs).” In an effort to
provide a more concise, definitive picture regarding the performance of the equity market, this data, a broad basket of eleven market capitalization weighted, industry-specific ETFs will replace the “Dow Jones U.S. Total Market Industry Groups.”
· The Vanguard Balanced Index Fund (VBAIX), somewhat of a proxy for balanced investors has fallen 16.26% through the close of the first half as in addition to the pullback in stocks, bonds, which comprise nearly 40% of the portfolio, have been under pressure. For example, the Vanguard Total Bond Market Index Fund (VBMFX) has fallen 9.92%.
· The upcoming week is chock full with potentially market moving economic data. These include on Tuesday, May Orders for Durable Goods as well as Factory Orders; on Wednesday, the Institute for Supply Management’s (ISM) Service Sector Index, the Job Opening and Labor Turnover Survey (JOLTS) and the Minutes from the June 14-15 Meeting of the Open Market Committee (FOMC) of the Federal Reserve; on Thursday the Weekly Report of Initial Claims for Unemployment Insurance and May Trade Balance. Then finally, on Friday May Consumer Credit as well as the June Payroll Report, to include the Household Survey along with the Unemployment Rate.
· The corporate earnings season is left with just a few stragglers prior to the beginning of the next during July. Nevertheless, there are some important reports expected this coming week. These include H&R Block (HRB), Pricesmart (PSMT), Levi Strauss (LEVI) and Helen of Troy (HELE).