As of today, June 16th, the S&P 500 Index is down 23.55% from its January 3rd peak, the NASDAQ is down a stunning 33.70% from its November 19th peak. 431 of the S&P 500 Stocks are down year-to-date. The Russell 2000 Index, small cap stocks, is below a level seen in 2018. Before Covid the S&P 500 hadn’t experienced a decline of this much since early 2009, the peak of the housing crisis.
Could this be the big one? Is there more pain in the markets coming? I will give you my thoughts on what is going on and what you should be doing to weather the current markets.
Inflation? Yes, there is inflation, the most recent reading at 8.6%, and price gauging occurring in our markets. State attorney generals, governors, and lately congress are moving forward with investigations into price gouging. I went to the store last weekend and the same deli meat I usually buy is more than 50% more expensive; eggs have gone from $1.67 to $2.52, 50%.
While inflation is currently more aggressive than at any time in my lifetime, the Fed is taking steps to hike interest rates on the money they lend to banks and the US Government. They are taking these steps to essentially “put the brakes” on the economy and demand for goods. Yes, my friends, I do believe the era of cheap money is ending. For now. But if inflation were really running away, wouldn’t we expect to see Gold, the “hedge” against inflation, go through the roof?
The Fed, and fear of the Fed raising rates, has caused bond yield to dramatically increase. Rates on the 10-year treasury closed 2021 out at 1.51%. On June 14th they had increase to 3.48%. What does this mean for investors and their bond funds? The total return of the S&P U.S. Aggregate Bond Index is down 11.63%. Even the most conservative investors have been hit hard in a relatively short period of time.
Never have stocks and bonds moved in such high correlation, or volatility for that matter, before. Even when they did move together there has never been a time that they have both been down over 10% at the same time. But this time is different. Three major factors that are exacerbating the downward pressure in markets are: Fed raising rates, the war in Ukraine, and China lockdowns.
In my opinion, those 3 items are currently causing continued pain for investors. For the markets to jump we need some sort of catalyst. The biggest would be the Fed slowing or pausing raising rates. They might do this if we go into a recession along with inflation abating. The second would be an end to the war in Ukraine. As of last week, Russia has made some major gains and the prediction is that this war will go on longer than anyone has though. Last is China, they have major lockdowns in some of the largest cities in the world. It does not help that they make so many of the goods we import. If these lockdowns are ended, we should see a boost to emerging markets and some normalcy return to supply chains, further reducing inflation.
So – how do you come out of this ahead where there are very few places to hide?
- Maintain good investor behavior – one of the most important parts of what I do as a financial advisor is help you keep good investor behavior. The time to sell is not after the market has gone down to lock in loses but turn our focus to actions we can control. What we cannot control is how and when the market will make moves up and down. There have been times it has gone up as abruptly as it has gone down. What we can control how much we spend, how much we save, what we do with our time day-to-day, and where we aim our focus.
- Rebalancing – rebalancing your account on a periodic basis. This is proven to not only reduce risk in your portfolio but help us get an outsized gain when markets return to their previous highs. I do this for most clients on the 15th of each March, June, September, and December or when the market has made expectedly large, short-term moves.
- Add to your Accounts – The old adage buy low, sell high. We have had few opportunities to buy in the last few years. In 2021 the market did not have a dip below 5%. That was not normal. If you have excess cash or money, you do not need to touch for the next 4+ years, now would be a reasonable time to discuss putting it to work.
- Income Plan – If you are taking income make sure it is in a sustainable raged (4% +/- 1%) and delay taking any extra distributions until your account has returned to a higher level. Also, if you are taking more than that, reduce distributions in the meantime. This will help your account recover more quickly.
- Financial Plan – There is no better time to reassess your financial plan than when there are major life changes or events that rock our confidence. This is by far the most important thing you can do. Not only can it reaffirm that you will be OK, but it can uncover opportunities for you to take action that you might not have taken in the past.