Following up June’s quarterly newsletter, there are 3 things I wanted to discuss to keep you informed and on track with your financial plans and decisions.
How have things changed since June? – I discussed what I felt are the 3 main catalysts for the market going up or down.
In June there were three major factors that are exacerbating the downward pressure in markets are: Fed raising rates, the war in Ukraine, and China lockdowns. The Fed has continued to raise rates at a fast pace. Expect this to continue until the rate of inflation drops. The war in Ukraine continues to cause fear in Europe, particularly over gas and energy prices as we move towards winter. China has continued lock downs and Covid policies that are still hurting not only their own economy, but the world supply chain also.
On top of all that, home prices in many of the overpriced markets in the western and southern regions have started to fall at the fastest pace in history. Although it has not hit the mid-west or northeast quite as hard. Expect this to continue as long as rates keep increasing.
What are current market conditions and what should I expect?
As of today, September 29th, the S&P 500 Index is down 24.10% from its January 3rd peak, the NASDAQ is down 33.13% from its November 19th peak, almost unmoved since June. The Russell 2000 Index, small cap stocks, after a mid-summer bounce has returned to below levels seen in 2018. 425 of the S&P 500 stocks are down year-to-date.
Not surprisingly, many of the companies’ stocks that are up this year are concentrated in oil/gas stocks, packaged foods stocks, pharmaceutical stocks, and military defense. Don’t let that completely fool you though, oil and gas stocks dropped so much during covid they have just returned to where they were 5 years ago!
If the calendar year were to end with markets at todays close, this would be the 6th worse year going back to 1926. Let me give you an idea on what happened those year:
Year | S&P 500 | Reason |
1931 | -43.8% | Great Depression |
2008 | -36.6% | Housing/Financial Crisis |
1937 | -35.3% | 1937 Crash |
1974 | -25.9% | 1973-1974 Bear Market/Oil Embargo |
1930 | -25.1% | Great Depression |
2002 | -22.0% | Dot-Com Crash |
Subsequent years in the stock market after major downs often are major rebounds:
Year | S&P 500 | Reason |
1932 | -8.19% | Continued Great Depression |
1933 | 53.99% | Start of 4-year bull run post-Depression |
2009 | 26.46% | Housing/Financial Crisis |
1938 | 31.12% | 1937 Crash |
1975 | 37.20% | 1973-1974 Bear Market/Oil Embargo |
1931 | -43.8% | Continued Great Depression |
2003 | 28.68% | Dot-Com Crash |
This does not mean that in 2023 we will see a large rebound, or any, but long-term investors should make changes or stick with their plan(s) accordingly.
With all the bad news those catalysts are still in play. 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. The last is still China, if their economy gets bad enough, they may decide to “play better” with the rest of the world along with easing lock downs.
I expect between March and July next year the Fed will stop raising rates and possibly even lower rates if we start to see some deflationary pressures. I feel that this will be the most likely catalyst to have the markets take a big jump in the second half of 2023. Until then, the market is likely to remain down with short term rebounds.
What should we be doing and what SHOULDN’T we be doing?
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. If the market takes an outsized daily move that is not fundamentally driven – expect me to take advantage of it and do a discretionary rebalance.
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 in your investment accounts. IF YOU HAVE CASH THAT YOU DO NOT WANT TO PUT AT INTO THE MARKETS BUT WANT HIGHER RATES THERE ARE CD’S AND PRODUCTS OFFERING OVER 4% IN ONE YEAR TERMS.
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. Do not sell out of accounts if they still are part of your long-term goals.
Do not fall for “too good to be true” – When things get tough people begin to look for how to “lose less” or “recover faster”. Make all decisions part of your plan. Feeling like making quick decisions to avoid downs or get back to even faster leaded to poor decisions. We will control what we can and make decisions based on the outcome you want to achieve, not a short-term speculative decision.
Let’s set a meeting soon to review your accounts and reassess your financial plan. I think this will not only give you more confidence in where you are, but we can find opportunities to keep your financial future moving forward.