Market Commentary
We’re on track for a record year – and not the good kind.
The S&P 500 Index is solidly in bear market territory, down 22% since the start of the year. In rough numbers, the year has gone like this: a 12% drop, a 11% gain, a 20% drop, a 17% gain, a 9% drop, a 5% gain, and most recently, a 10% drop. For those scoring at home, that’s close to four double-digit declines in under nine months, with a few double-digit gains sprinkled in. “Volatility” doesn’t do that justice.
As an aside, those swings highlight the incredible challenges of market timing. It’s a common desire to “get out of the market until things get better.” What is better? Does a 17% gain signal a turning point for the market? Perhaps, but perhaps not. When do we actually know for certain?
Unfortunately, the pain has not been isolated to the stock market. Going back to 1926, there have been just two calendar years when stocks and bonds were both down (Callan), and 2022 is on track to be the third. The U.S. bond market was down close to 11% through August, and global government bonds are on track for the worst annual loss since 1949 (BofA Global Research). Nearly every financial asset is in the red, and that adds up to a distinctly painful time for investors.
What is the outlook from here? Every bear market (and recession) is unique, and zero interest rates followed by pandemic-induced supply chain shocks and soaring global inflation is certainly a scenario without precedent. In the words of the late economic historian Peter Bernstein, “We simply do not know what the future holds.” That includes highly paid Wall Street strategists.
According to the most recent survey of strategists, year-end targets for the S&P 500 Index ranged from 3,600 to 4,900. In other words, a drop of 2% to a gain of 33% from here. The median target was 4,300, or a gain of 17%. Honestly, as these are all guesses, there really isn’t much to gain from these numbers.
However, here are a few reasons for optimism in the months and years ahead.
The fact that lower prices for financial assets lead to higher expected returns is an investment truism. Although it may feel better to be invested when markets are soaring higher, the long-term outlook for investments actually improves when prices are going the other direction. The discipline to take advantage of that is most definitely a challenge, but that’s how financial markets work.
According to data from Ben Carlson with Ritholtz Wealth Management, stock returns during years of both rising and falling interest rates were roughly identical over the past 93 years. In other words, interest rates seem to be less of a concern for stocks than many believe. However, returns during years of falling inflation averaged 14.7% versus 5.5% during periods of rising inflation. It’s too early to call a turning point on inflation, but the Federal Reserve is without a doubt focused on the problem.
An interesting contrarian indicator worth noting is consumer sentiment. The level of consumer confidence reached a 50-year low in June and remains at very pessimistic levels. According to J.P. Morgan, stocks have experienced average gains of nearly 25% from the 8 prior troughs in sentiment. Historically, gloomy consumers have been a good sign for stocks.
Perhaps the bigger story is that return prospects for bonds have significantly improved. The yield on a one-year Treasury recently reached 4%. One year ago, it was 0.07%. Investment-grade bond yields are at their highest levels since 2009, now averaging more than 5%. Even money market funds have reached a 2% yield after years of near zero returns.
Bear markets are unquestionably painful. It may not feel like it today, but the outlook for markets has improved. A diversified portfolio works for those who have the fortitude to stick with the plan.
Every year, we revisit your cash flow and spending needs and do projections using moderately conservative long-term returns. We plan in advance for the bad years and make sure you have plenty of cushion to weather down markets. In our most recent round of projections, the fall in asset prices have affected the outcome of the financial plans only a bit.
We can’t predict the future, but we can help you stay resilient for whatever the future holds. We’ll continue to rebalance, revisit your spending to make sure you are still doing okay, and help you stay tax efficient. A consistent plan is much better than reactive decision making.
Our advice to you – don’t change what you are doing. Keep living your good life. We’ve been through down markets a number of times in the 20 years Life Planning Partners has been in business. When people stick with the plan, they do just fine. Let us know what we can do to help.
