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Key Points for the Week
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What is a bear market?
People define bear markets in different ways. Some people say a share price decline of 20 percent is bear market territory. Last week, the Standard & Poor’s (S&P) 500 Index was down 19.6 percent before Friday’s rally, according to Ben Levisohn of Barron’s, and the Nasdaq Composite was already down more than 20 percent.
Other people say a bear market occurs when more investors are bearish than bullish. That’s certainly the case today. The Association of Independent Investors’ Consumer Sentiment Index found 49 percent of investors were bearish and 24 percent were bullish last week. Other sentiment indicators, including the Consensus Bullish Sentiment Index cited by Barron’s, also show that investors and investment professionals are feeling more bearish than bullish.
So, it’s safe to say we’re either in a bear market or quite close to one.
The decisions investors make today can affect long-term outcomes
While it is never comfortable to watch the value of savings and investments drop, as they do during a bear market, it’s important to remember that the decisions you make today can have a significant effect on the value of your portfolio over the long-term. During bear markets, investors may choose to:
A few words of wisdom
If you’re feeling uncertain, this is a good time to revisit the words of Randall Forsyth and Vito Racanelli of Barron’s. In 2008, they wrote, “The good news is that once the decline reaches that arbitrary 20% mark, based on history, the market has suffered most of its losses. The bad news is that the decline typically drags on for some time, and time may be the worst enemy…as the decline wears down investors' psyches, they tend to bail out at the market's nadir, when things look bleakest – and when the greatest opportunities present themselves.”
Market volatility continues to make life challenging for investors. The S&P 500 declined for the sixth straight week, the longest streak since 2011. Six-week losing streaks used to be much more common. The S&P 500 declined at least six consecutive weeks six different times from 2000 to 2011.
The string of accelerating inflation was broken. The Consumer Price Index (CPI) increased 0.3% last month and has now risen 8.3% over the last 12 months. The 0.3% was a slowdown from recent data, and the annual rate declined 0.2% in the last month. Much of the slowing was attributed to gasoline prices, which fell but have since rebounded to record highs. Core inflation, which excludes food and energy, rose 0.6% as high rents and costlier airfares contributed to strong gains in inflation.
Inflation has been a hot topic on corporate earnings calls. Approximately 85% of S&P 500 companies have mentioned inflation on their quarterly calls with shareholders. S&P 500 earnings are expected to grow 9.1%. Companies are beating earnings by less than normal. With more than 90% of companies reporting, earnings are beating estimates by 4.9%, compared to a recent average of 8.9%. Consumer discretionary and communication services companies are missing earnings estimates most frequently, and those two sectors have underperformed the broader markets.
Last week, the S&P 500 dropped and narrowly missed breaking through the 20% threshold, typically defined as a bear market, before rallying on Friday. The global MSCI ACWI declined as well, while the Bloomberg U.S. Aggregate Bond Index rallied. U.S. retail sales data will be released this week and will indicate how consumers are responding to higher inflation.
The S&P 500 narrowly missed a bear market on Thursday. The index of large-cap stocks finished 18.1% below its closing high on Jan. 3, 2022. At one point Thursday morning, the S&P 500 was 19.6% below its closing high before rallying on Thursday afternoon and then staging a strong rally on Friday.
The volatility would likely be easier to bear if it hadn’t been going on for a while. Last week’s decline was the sixth straight weekly decline. As noted above, the S&P 500 hasn’t had a six-week losing streak since 2011. However, the previous 11 years included six losing streaks of six weeks or longer. The longest streak occurred in 2001, when the S&P 500 declined eight consecutive weeks. The Federal Reserve was part of the issue then as well. Markets had expected a 0.75% cut in rates and the Fed cut rates just 0.5%.
Consumer prices rose 0.3% in April, which is the lowest increase since August 2021. Even though monthly inflation dropped, monthly increases of 0.3% still translate into inflation between 3% and 4%, above the Fed’s target of 2%.
Is it possible inflation may have reached a peak? It started accelerating in September 2021, meaning future reports will need fairly high readings to keep inflation at current levels. The Fed’s recent interest rate hikes have already made certain types of borrowing less attractive, reducing demand. Other factors are also pushing against inflation. The stock market decline means some people may not have as much money to spend or feel as confident about spending what they have. Government spending has slowed compared to extreme spending in response to COVID-19. The increased strength in the dollar is helping to reduce the cost of imports.
Energy prices remain the biggest risk to the thesis that inflation will start declining. Last month, gasoline prices dropped 6.1%, and that decline contributed to lower overall gains. Gasoline prices have subsequently rebounded to new highs, and core inflation, which excludes food and energy, remains strong. The core rate increased 0.6% in April. So, it is possible inflation may have peaked or is close to doing so, but that doesn’t change the fact that inflation pressures remain high.
Some of the trends pressuring markets may be at inflection points. Inflation may be peaking, and employment has nearly recovered all of its COVID-led losses. The Fed has committed to moving toward a more normalized interest rate environment, and we are working through the second year of a presidency, which typically produces the weakest performance of the election cycle.
Challenges like this one are not new. Staying focused on your long-term goals during difficult times is an important part of harnessing the long-term gains in equity markets. While the rapid increase of inflation has been tough, so were periods like the 1987 market crash, the bursting of the dotcom bubble, and the global financial crisis. Yet, markets worked through those periods and moved on to new highs.
In fact, the longer you stay invested the less decisions matter about what types of stocks you invest in. In the short term, value stocks have been rebounding after a long period in which growth outperformed. Over the long term, sticking with stocks, regardless of style, makes a big difference. In the last 10 years, the S&P 500 has increased 13.7% per year. Large-cap value and growth stocks have both increased more than 10% per year over this period. Global stocks, represented by the MSCI ACWI, have climbed 9.2% per year. Bonds have generated positive returns. This performance didn’t come in periods of pure calm with a perfect economy. Inflation has been too low and too high. Both parties have held the presidency. We’ve faced a global pandemic and its aftereffects. In spite of all these challenges, markets have climbed higher.
On August 13, 1979, the cover of the magazine declared: The Death of Equities: How Inflation Is Destroying the Stock Market. The S&P 500 Index closed at 107 that day. As it turned out, they were wrong, and equities weren’t dead. The value of the S&P 500 Index rose significantly over the next few decades.
Over the last 50 years, there have been other events that caused investors to think the worst. For example:
Black Monday. At the end of trading on October 19, 1987, stock markets around the world had experienced the biggest one-day decline in history, according to the Federal Reserve. The Dow Jones Industrial Average lost 22.6 percent that day and finished at 1,739. (The Dow had gained 44 percent during the previous seven months.)
Last week, the Dow closed at 32,197.
The Dotcom Bubble. In the 1990s, everyone wanted to participate in the commercialization of the internet by investing in technology companies – even those that weren’t profitable. A speculative bubble formed and popped, reported Adam Hayes of Investopedia. The Nasdaq Composite Index lost almost 77 percent from March 2000 to October 2002, when the Index moved up from a low of 1,114.
Last week, the Nasdaq finished at 11,805.
The Housing Market Crash. The subprime mortgage market grew fast in the early 2000s, following a change in regulations. Lower-quality mortgages were often included in mortgage-backed securities. When home prices fell, borrowers defaulted, and financial markets were disrupted, reported Paul Kosakowski of Investopedia. The S&P 500 fell from 1,565 in October 2007 to about 1,276 in March 2008.
Last week the S&P 500 finished at 4,024.
The weight of evidence accumulated over time supports the idea that holding a well-allocated and diversified portfolio focused on your financial goals is a sound choice. During periods of volatility, like this one, it’s important to stay focused on your long-term goals.
Past performance is no guarantee of future results.
According to an audit report (2022-40-036) published on 5/4/22 by the Treasury Inspector General for Tax Administration (TIGTA), a service-wide strategy is needed to address challenges which limit growth in business tax return electronic filing. The report states "This audit was initiated because the IRS's continued inability to process backlogs of paper-filed tax returns contributed to management's decision to destroy an estimated 30 million paper-filed information return documents in March 2021. The IRS uses these documents to conduct post-processing compliance matches to identify taxpayers who do not accurately report their income." The IRS advised the TIGTA that once a tax year concludes, the information returns, Form 1099-MISC (Miscellaneous Information), can no longer be processed due to system limitations. This happens because the system used to process the information returns is taken offline for programming updates in preparation for the next filing season.
May 16, 1929: First Academy Awards Ceremony
On May 16, 1929, the Academy of Motion Picture Arts and Sciences handed out its first awards, at a dinner party for around 250 people held in the Blossom Room of the Roosevelt Hotel in Hollywood, California.
The Academy was organized in May 1927 as a non-profit organization dedicated to the advancement and improvement of the film industry. Its first president and the host of the May 1929 ceremony was the actor Douglas Fairbanks, Sr. Unlike today, the winners of the first Oscars, as the coveted gold-plated statuettes later became known, were announced before the awards ceremony itself.
The Academy officially began using the nickname Oscar for its awards in 1939; a popular but unconfirmed story about the source of the name holds that Academy executive director Margaret Herrick remarked that the statuette looked like her Uncle Oscar. Since 1942, the results of the secret ballot voting have been announced during the live-broadcast Academy Awards ceremony using the sealed-envelope system. The suspense, not to mention the red-carpet arrival of nominees and other stars wearing their most beautiful or outrageous evening wear, continues to draw international attention to the film industry’s biggest night of the year.
I think having land and not ruining it is the most beautiful art that anybody could ever want to own.
Andy Warhol, Artist and Film Director
I always wanted to be somebody, but I see now I should have been more specific.
Lily Tomlin, Actress and Writer
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Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with SPC or S&M. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation of an offer to buy, hold, or sell any security referred to herein. There is no assurance any of the trends mentioned will continue in the future.
Any expression of opinion is as of this date and is subject to change without notice. Opinions expressed are not intended as investment advice or to predict future performance. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Stock investing involves risk including loss of principal. Diversification and asset allocation do not ensure a profit or guarantee against loss. There is no assurance that any investment strategy will be successful.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as "The Dow" is an index used to measure the daily stock price movements of 30 large, publicly owned U.S. companies. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system.
The MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2007, the MSCI ACWI consisted of 48 country indices comprising 23 developed and 25 emerging market country indices. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
The Bloomberg Barclays US Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented.
Please note, direct investment in any index is not possible. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Third-party links are being provided for informational purposes only. SPC and S&M are not affiliated with and do not endorse, authorize, sponsor, verify or monitor any of the listed websites or their respective sponsors, and they are not responsible or liable for the content of any website, or the collection or use of information regarding any website's users and/or members. Links are believed to be accurate at time of dissemination, but we make no guarantee, expressed or implied, to the accuracy of the links subsequently.
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