“The two most powerful warriors are patience and time.” – Leo Tolstoy
“Life and investing are long ball games.” – Sir John Templeton
Historically speaking, September is the worst month for stock market performance. The year 2022 followed the trend with really poor returns across the globe. All of the equity indexes we follow were down significantly for the month. A boost to short-term rates at the September meeting of the Federal Reserve Board pushed the Bloomberg Aggregate Bond index lower. Fears of a global recession, combined with improving supply chains, helped reduce the CRB Commodity Index down more than 9.5%!!! The US Dollar has continued to be unusually strong, up 3.37% for the month and 17.42% for the year.
All data as of 10/01/2022, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
In our Stock Market Outlook 2022, we prognosticated it was going to be a hard year for the stock market, given the excellent returns from 2019 through 2021. What we (or anyone else) did not anticipate at the time was war in Europe, high inflation, and the fastest rate hike cycle by the Federal Reserve Bank in its history. All of this, plus an economy that may or may not be in a recession, has led to a bear market for stocks.
This happens from time to time. Bear markets are a part of stock market investing, and are the reason why the long-term returns are better than they are for cash or bonds. The downside is that to be successful you need to have the fortitude to stay the course through the bad times.
Bear markets tend to coincide with recessions. To help the economy recover, the Federal Reserve Board (The Fed) will typically lower short term interest rates to stimulate economic growth. Anticipating better economic times the bear market will end and stock prices move higher once again.
That’s how it typically works.
2022 has not been a typical year.
Coming out of the global lockdown from Covid has been a challenge. You surely know the story of supply chains and shutdowns. I suspect everyone reading this has been affected in some way, be it waiting a year for a new Trek Gravel Bike, paying $5,000 above sticker price for a new car that doesn’t have all its features, or paying $3.50 for a dozen eggs.
The end result has been inflation. That inflation has led The Fed to be aggressive with interest rate policy to tame the current inflationary environment. In its basic form, when bond yields move higher, bond prices move lower. The result has been historically awful bond returns.
For the more conservative investor, the resulting situation has been a shock. Balanced portfolios – 40-60% stocks and 40-60% bonds – have not been buoyed by the bond performance. Instead, balanced portfolios have performed much more like equity portfolios.
The good news: We DO NOT expect this to continue!!!
Big Picture Stock Market Perspective
As we stated at the top, the stock market is in a bear market, with the S&P 500 is down 24.77%. Not the year we expected, but not unprecedented. Bear markets happen. In 2020 the S&P 500 dropped more than 30% as the world shut down during the covid crisis. In 2008 the S&P 500 was down 36.55%. In the “tech wreck” of 2000 – 2002 the index shed more than 40% while the NASDAQ index was down almost 90% from it’s Mach 2000 peak.
In each instance, patience and persistence was a virtue. Those who stayed the course with a properly diversified equity investment saw new highs for the stock market once the bear markets ended.
Was it a pleasant experience sitting through the bear? Absolutely not. Was it necessary? Absolutely.
Key Takeaway: Decisions made during bear markets can make or break long-term investment success.
Is There More Downside Ahead?
The short answer is maybe. The longer answer is it depends.
The stock market doesn’t exist in a vacuum. What is happening in other markets – global stock markets as well as other financial assets – will affect how stocks are valued. Right now, we believe, there are two markets that have had a decisive influence in the current downtrend and will be key to the end of the bear market.
Chart #2 shows the S&P 500, the US Dollar Index, and the 2-Year Treasury Bond yield. What is plan and clear to us is that the move lower in stocks has coincided with strength in the dollar and spiking interest rates.
Of interest, however, is the possible change we are seeing in all three indexes. Stocks have bounced off the late September lows as the dollar and 2-year yields both look like they have stalled. At a minimum, this has given us some temporary relief.
Taking a look at the S&P 500 itself, we see a clear downtrend with a possible bottoming pattern. The key word in the previous sentence is “possible.” There are no guarantees. This very well could be the bottom of the bear market, or this could be another stop on the way lower. Six months from now we can definitively tell you exactly what this is. In real time, making such a declarative statement is just not possibl
With that said, we do see some positive. To start, investors have been jittery of late. We have witnessed this in phone conversations and meetings with clients and prospects who are nervous.
Beyond Magellan Financial, we know that investors are hiding in cash. According to BofA Global Research fund managers are sitting on 6.1% cash (highest level in 20 years) while average investors have planted $4.44 trillion in money market funds. This is typical activity around market lows.
Just recently, the stock market hasn’t been selling off on poor news as it has all year. Over the recent past the stock market has taken in stride four big pieces of news:
- The U.K. government unexpectedly announced tax cuts that sent the British pound tumbling.
- The Nord Stream gas pipeline was damaged, possibly sabotaged, further complicating Europe’s energy security.
- Russia announced the illegal annexation of regions in Ukraine after sham vote.
- Federal Reserve officials have not backed off their hawkish interest rate stance even as the risk of a recession increases.
Finally, we are in the part of the 4-year presidential market cycle where the market has historically turned higher. Chart #4 illustrates where we are currently vs. the aggregate cycle.
While none of this may sound stock market positive, it is. Market bottoms don’t happen when everything is roses and unicorns. No. Market bottoms happen when investors are scared, the news is bad, and the economic outlook is not so good. That, my friend, is where we may be right now.
Emotional Investing Decisions Can Be Costly
The 2022 Dalbar study on investor performance shows the damage bad investment decisions can make. In the 30-year period from 1/1/1993 through 12/31/2021 the average equity investors underperformed the S&P 500 by 3.52%. In real dollar terms, $100,000 invested at the start date would be worth $789,465 for the average investor. Very impressive, until you realize that the S&500 index would be worth $2,082,296. That’s a lot of money to leave on the table.
What Can Investors Do Right Now?
Don’t be your own worst enemy. Stay Invested. Many investors will ditch their long-term plan with short-term strategies. In good times that takes the form of performance chasing. In bad times it can take the form of market timing. When you say you want to get out of the market for now and get back in when “things get better,” you are market timing.
Spend your time thinking about what you can control, not those you cannot. What can you control?
- Your Diversification (Asset Allocation): According to Ibbotson’s research 90% of investment returns are determined by what asset classes you are invested in. What that allocation should be for you is based on your personal risk tolerance, your stage of life, and your goals. At Magellan Financial, through the Envision Process we make sure you are taking on the amount of risk you need to reach your goal.
- Your Savings Plan: How much you save is just as important as your asset allocation. How much should you be saving? Early in life the correct answer is as much as you can. Monies invested in your 20s are more valuable than those saved in your 50s or 60s because you have so much time for the compounding effect to work in your favor. No matter where you are in life it is important to have a plan for saving.
- Your Behavior: You can make the choice to not let stress short-circuit your decisions. Stress often leads us to feeling very action-oriented. We skip over the thinking and feeling, and get right to doing. We encourage you, as we are doing ourselves, to slow down before making any decisions and acknowledge how you’re thinking and feeling before you take action. Don’t hesitate to reach out so we can talk things through before you make any big moves.
- Your media consumption and how it affects you: Every week we take phone calls from clients who are concerned about (insert bad investment outcome here) because of something they saw on the news or read an article off their Twitter feed. Media is entertainment and should be viewed through that lens. Many (most?) commentators on the business news channels are talking at you with an agenda. That agenda isn’t necessarily to give you great, personalized investment advice.
Remember, long-term market returns are a result of actions taken in falling markets, not rising markets. For those of us who are not yet retired and saving in retirement accounts you should continue to invest for your future … maybe even increase your savings rate if you can afford to. It may not feel like it, but the investment environment is much better today than it was a year ago. If you have a time horizon of 10+ years, I would be hard pressed to give a reason why you would sell equity (stock) positions right now. Markets are on sale.
Have an investment plan and stick with it. If you don’t have one, call us.
How we, as individuals, manage through bear markets are the key to financial success. Markets are not in our control, but how we react to markets is. Investing is a long game that required both patience and time.
That said, we get it. Bear markets are never easy. Investing can be emotional – it is, after all, our financial wellbeing we are talking about. For those in the accumulation phase it is easy to question why we continue to invest when “everything” is going down. For the retiree, bear markets can make us question the ability to maintain lifestyle. It can become rather emotional.
The current bear market is 9 months old. This time the cycle has been a unique as bonds and stock have both been moving lower. Which may make this the perfect time to take a look at your Asset Allocation and question your personal risk tolerance.
Out of bear markets come opportunity. After a decade of historically low bond yields and cash investments paying zero or close to zero interest, both are now viable investment classes. Right now, the opportunity is with your Asset Allocation and the risk you are taking in your investment plan. We have been finding that in many cases clients have been able to reduce future equity exposure.
Bottom Line: Don’t be your own worst enemy. Get the advice you need. Stay smartly invested. Focus on what you can control.
On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.
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