· Hawkish statements from the Fed strongly suggest, and rightly so, that past puts (floors) that the Fed has provided are not currently in their plan, at least in the near term. At this time we believe the decline in the stock market has mostly priced in a modest recession. Certainly, stocks can overshoot to the downside. However, for investors with a time horizon of more than a minute or two, certain dislocations have priced some industries and specific securities very attractively. With this in mind, and given what we believe will be a choppy summer, dollar cost averaging would be a prudent course of action.
· A late day rally on Friday helped the S&P close fractionally higher, thereby averting closing 20% or more below the record high of 4,796.56 set this past January 4th. However, as measured against its intraday low of 3,810.32 the S&P 500 was off 20.56%, which as measured against a record closing high of 4,796.56 set this past January 4th technically marked bear market territory. Of note, according to research by Bloomberg “in 1998, 2011 and 2018, the benchmark slid below the 20% level or very near it on an intraday basis – only to reverse itself and never test the bear market waters again.” We wouldn’t take that to the bank. However, it does perhaps set stocks up for at least a technical bounce from here.
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.
In our opinion, 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%, 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.”
· Sour earnings from the country’s largest retailers, namely Walmart and Target along with their description of the cause for the weakness is quite revealing in regard to the supply chain as well as the state of the consumer. Walmart blamed some of the shortfall on “double digit inflation” in food costs while Target pinned their poor earnings on a shift in consumer demand.
· 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 17.68% thus far this year. However, over the past three-years it has averaged 13.02% per annum.
· This past week marked the seventh consecutive weekly losing streak for S&P 500 and NASDAQ Composite as well as the eighth for Dow Jones Industrial Average.
· 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.
· 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 15.03% 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%.
· 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 New Home Sales; Wednesday, April Orders for Durable Goods; Thursday, First Revision to First Quarter (Q1-GDP) Gross Domestic Product and the Weekly Report of Initial Claims for Unemployment Insurance; and on Friday, April Personal Income and Spending as well as the Final Report on Consumer Sentiment from the University of Michigan.
· The corporate earnings season has begun to wind down. Nonetheless, there are some important reports expected this coming week. These include Intuit (INTU), Netease (NTES), Agilent Technologies (A), Snowflake (SNOW), Nvidia (NVDA), Alibaba Group (BABA), Costco Wholesale (COST), Medtronic (MDT), Marvell Technology (MRVL), Baidu, Inc. (BIDU), Dollar General (DG), Autodesk (ADSK), Workday (WDAY), Vmware (VMW) and Pinduoduo (PDD).