Let’s Start with The Soft Stuff…
In every bear market, diversification comes into question. In 2008 it was housing. This time around, it’s bonds. It’s not typical to see stocks and bonds go down simultaneously. Does that mean diversification is dead? Or are we here because the pandemic sent interest rates to historic lows and inflated the money supply and now the economy is normalizing? How are we navigating the market from here?
The opposite of diversification is concentration. Concentration in your portfolio can make you wealthy overnight, but it can also make you poor just as quickly.
You likely have one of two emotions: FOMO (fear of missing out) or TGINIT (thank God I’m not in that). The latter is more popular these days. Our focus is to maintain a diversified portfolio, acknowledging that different sectors come in and out of favor at unpredictable times. Attempting to minimize volatility in this way helps minimize these emotions.
In every bear market, it’s hard to see the end.
With the Fed raising rates, inflation, China’s pursuit of “Zero Covid,” the war in Ukraine, labor shortages, and supply chain problems – it’s hard to see what needs to give for optimism to improve. Despite the negative headlines, positives include companies reporting strong balance sheets flush with cash, low unemployment, and credit in the municipal bond market is as strong as ever.
It’s pointless to say we’re “cautiously optimistic” because that’s just a safe way of saying we don’t know what’s next. Investing in the markets is uncertain. Because of that uncertainty, there’s a positive premium when investing in the market vs. risk-free assets. By investing in the market, we’re betting on human ingenuity to solve problems, adapt, and innovate.
We can say confidentially that every bear market presents a buying opportunity (until the next one, of course). It won’t last forever, even though it feels like it.
Items to Tackle Now
- Keep investing
- Consider a Roth IRA conversion. With depressed price levels, your account may recover in a tax-free environment.
- Rebalance and Tax-loss harvest. We are actively performing this for our clients (for the second time this year) now.
Where To Go from Here
We have access to more information and advice than ever before. Markets tend to overshoot longer-term trends on volatility in both directions. It’s difficult to separate high-quality, long-term investment advice from knee-jerk trading suggestions.
Given market volatility and negative press, investors may decide to sell and “wait” for conditions or valuations to improve before reallocating funds. But most cannot time the market perfectly, which translates to a lost opportunity. Reacting to volatility in this way, when viewed in hindsight, looks more like noise than a signal.
Missing just a few days during a market rebound consistently results in lower portfolio values. What’s the solution? Patience & Discipline.
Want to Get More Technical? Here is where we sit today.
Economics
- Fears of stagflation (high inflation with slow growth) shift more towards a recession brought on by surging inflation, jarring shifts in monetary policy, termination of pandemic benefits, and changing patterns of the US consumer.
- The path of inflation remains the wild card for 2022, with further uncertainty posed by geopolitical events.
- Combating inflation is the Fed’s focus; we’ve had two interest rate hikes so far this year, and two more are likely. The Fed isn’t well known for accomplishing a “soft landing,” but that is the goal.
- Economists argue the Fed may not be able to fix this, and that higher taxes are the solution. There is just too much money in checking accounts and taxes are the only way to get it out.
Equities & Fixed Income
- As of May 23, 2022, the S&P 500 is down 18% year-to-date (5.6% for May).
- Companies, including Walmart & Target, reported weaker-than-expected fiscal Q1 earnings amid supply chain disruptions, increased costs, and persistent inflationary pressures, mainly on food and fuel.
- Retailers are struggling to navigate the changing preferences of the US consumer.
- Energy is the only sector up year-to-date.
- Since the pandemic, home sales fell to the slowest pace, dropping homebuilding sentiment to 2-year lows.
- On the fixed income front, high-quality bonds typically outperform during recessions. This assumes inflation has peaked.
- While peak economic expansion is behind us, hopes of growth remain if industrial production /capacity utilization/supply chain issues continue to improve, inflation has peaked, China loosens its COVID policy, and the Russian/Ukraine conflict doesn’t worsen.
Commodities
- Fundamentals are priced into the oil markets (WTI is hovering between $100 and $115/barrel), but the long-term trend remains bullish.
- Natural gas is also bullish; a supply-side bid remains until there is a resolution to the Russia/Ukraine war.
- Copper benefited from the larger-than-expected rate cut in China (implemented to improve its sinking hosing market).
- The upside is limited for gold until the uptrend in the dollar and real rates cool down.
It’s helpful to separate the economy from the market.
The economy is what’s happening right now, while the stock market is forward-looking – are things getting better or worse? Because of this, the market tends to price an event before it happens, good or bad.
Take March 2020 as an example. When the market bottomed on March 23rd, the economy was actually in great shape, but the outlook was bleak. When the market rebounded in Fall 2020, the economy was in terrible shape, but the outlook was strong.
There’s no doubt these are emotional times. If you haven’t received the messaging from us that you need to hear, contact us. Let’s get through this together.