· Despite Friday’s massive rally, for the entirety of this past week, stocks continued to struggle. There was, however, a welcome stabilization of bond prices (interest rates), which could ultimately provide at least a temporary floor to stocks and at most a permanent one. Of note is the fact that the S&P 500 hit an intraday high of January 4, 2022 of 4,818.62 and an intraday low of 3,858.87 this past Thursday, May 12 for a decline of 19.92%, just a whisker under 20%, the widely accepted definition of a bear market. Perhaps this is what caused the market to bounce Friday as quite often investors, as do many others, place importance in round numbers such as these. In fact, during the corrections of 2011 as well as 2018, the S&P 500 came within one percent of twenty percent declines which marked the ultimate bottom. Time will tell.
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. (See the “Notable Quote” from Warren Buffett below.)
We continue to espouse that “despite the recent drop in the financial markets, there are signs of hope, not the least of which is your reaction to that statement – most likely one of skepticism. This intermediate-term optimism rests in our belief that we are well on the way in deflating the asset excesses created by a far too accommodative monetary policy; easier year-over-year corporate earnings comparisons during the back half of 2022 (especially during Q4); a China coming to grips with its disastrous COVID policy; historically high bearish sentiment; a hawkish Fed that may ending up talking tougher than it acts; a leveling of market based interest rates; perhaps decelerating inflation ; and the approaching Mid-Term Elections. (See further explanation regarding some of these items below.) We highlight intermediate-term as we continue to believe that some of the issues above may prove a short-term headwind to market gains, but longer-term positive.
Given the above and the fact that more than half of the NASDAQ Composite has dropped more than 20%, more than forty percent has dropped more than 40% and over one-quarter has dropped more than 60%, it is time to begin selectively adding to those areas that we believe will rebound sharply once at least some of the uncertainty lifts. In our opinion, the potential for substantial gains over the next three to five years certainly outweighs the short-term risk. However, as noted within numerous earlier columns, unlike recent pullbacks, the recovery from this one will most likely be more of a process rather than an event.”
· Historical data provide a guide, a potential window to future events. Absence an unprecedented event, 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 these test the patience, faith and resolve of even the most seasoned investors.
· Investor Sentiment remains near its lowest level in 30 years. However, according to the American Association of Individual Investors (AAII), “historically, the S&P 500 index has gone on to realize above-average and above-median returns during the six- and 12-month periods following unusually low readings for bullish sentiment.”
· There is no port in the storm as is evidenced by the fact that according to data provided by BrightScope and reported by Bloomberg, all but twelve of the largest 100 401(k) funds have posted double-digit losses. The largest of which is the Vanguard Institutional Index (VINIX) which has declined by 13.08% thus far this year. However, over the past three-years it has averaged 13.8% per annum.
· Fed Chair Jerome Powell should never have stated that “a 75 basis point increase is not something that the committee is actively considering.”? There was no need as the market interpreted this as a continuance of a too dovish Fed. There was nothing to gain.
· 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.
· In almost a mirror image of the last decade, current market leaders include Oil & Gas and Utilities while the current laggard is predominantly Technology. We believe that Oil & Gas will remain a leader with Technology ceasing to lag during the final third of 2022.
· 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.
· The Vanguard Balanced Index Fund (VBAIX), somewhat of a proxy for balanced investors has fallen 13.82% year-to-date 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 ETF (BND) has fallen 9.71%.
· U.S. mortgage rates remained little changed versus one week prior with thirty-year mortgage rate closing Friday at 5.30%. The 15-year and 5/1 adjustable rate mortgages closed at 4.48% and 3.98%, respectively.
· For reasons noted above, we expect 0.50% consecutive hikes in the Federal Funds rate following the June 15 as well as July 27 meetings of the Open Market Committee of the Federal Reserve. In addition and despite claims by Chair Powell to the contrary, we believe a 0.75% increase at the conclusion of the June meeting is not off the table.
· The upcoming week presents some potentially market moving reports, to include on Tuesday, April Retail Sales, March Business Inventories and April Industrial Production and Capacity Utilization; on Wednesday, April Housing Starts and finally on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and the Index of Leading Economic Indicators (LEI).
· The corporate earnings season continues in full swing as the upcoming week is chock full. Expect reports from Walmart (WMT), Home Depot (HD), JD.com (JD), Baidu (BIDU), TJX (TJX), Cisco Systems (CSCO), Lowe’s (LOW), Target (TGT), Tencent (TCEHY), Analog Devices (ADI), Applied Materials (AMAT), National Grid (NGG), Palo Alto Networks (PANW), Ross Stores (RST) and Deere & Company (DE).