June 17th, 2022
Please reach out with any and all questions you may have. We are closely monitoring the markets and portfolios. But, let’s ensure we are still on course with your goals and nothing has changed with your particular lifestyle or situation.
Thoughts since May 13th
I hope you had a chance to read our last commentary (www.GladstoneHFS.com heading HOFFMAN MARKET COMMENTARY).
This last month has pushed the markets into a BEAR market.
Bear Market - A bear market is a decline of 20% or more from recent highs. It's symbolic psychological hurdle for investors that often portends a recession. Wall Street is spooked the Federal Reserve will be more aggressive than previously thought to cool inflation, perhaps triggering an economic downturn.
It’s been a continued rough month for the US markets and the numbers aren’t pretty: through the middle of June, the S&P 500® Index (“SPX”) was down approximately 22%, with the NASDAQ (“NDX”) down 31.85% year-to-date.
The brighter side of the Numbers
There have been large swings and even larger downturns in the last month. However, those swings are seemingly in line and following our analysis. The volatility, the burst of gains and losses seems to coincide with our third quarter predictions. While we do not have the proverbial crystal ball, we do look forward to the last quarter of 2022.
As the markets change and the numbers change, we continue to look at history for answers. We have included a chart A1 of the markets since 1946. You can refer to the chart directly, but to summarize;
What we have seen since 1946 are 15 times the markets have entered bear market territory. There are only 3 years in that history when the markets did not have a positive return 12 months later. 1974, 2001 and the dreaded 2008. If you remember and agree that 2008 was a particularly different set of problems, then these statistics should help to ease some of our tensions. If this year follows course, our hope is for the market to make back some if not all the losses from 2022 over the next 12 months.
Towards the future
(Chart A2) There are other key historical pieces of data which seem to support a brighter long view. If we look at investments and the markets not by the year, or even 10 years, we can see a pattern of cycles lasting around 16 years. These cycles show long periods of the Dow Jones with minimal returns
(Bear markets) followed by years of Bull markets and upswings. While these are just patterns and not a foretelling of the future, if these patterns continue, we may just be in a small breathing period before stocks resume their strong growth. If these patterns hold true, we may even seen a continued upward swing for the next 5-10 years.
How does this broad market affect your portfolio and investment?
We have yet to hear of someone that can predict when exactly any market will hit its’ peak or bottom. But, looking broadly at the history and the cycle of the markets informs us about where markets may be heading in the next 3 months or 5-10 years. Given this information and history repeating itself, our focus during this time is to ensure your overall portfolio and the individual holdings meet your goals, and are performing at an appropriate risk adjusted level, while maintaining our eye on the future. Now is the best time to ensure the current conditions and your goals are still aligned.
We should be reviewing certain factors in particular:
Timeframe - When will we need to start taking money from the investment?
Objective - What is the purpose of the investment?
Risk - What is our expectation of risk vs reward?
We continue to allocate portfolios based on these goals and set return expectations based upon the S&P 500 and other indices. We cannot control the broad markets or the economy. But in times like this when these broad based goals can seem to be in direct competition to the current market conditions. We can control the portfolio, the individual investments and try and take advantage of the possible opportunities presented. Some of these small advantages during volatility allow us to review, rebalance portfolios and reinvest dividends. Rebalancing plus the addition of dividends, and the addition of cash, allows purchasing shares at a possible lower share price. Thus the old expression “buy low, sell high”. This can help create greater returns and limit losses in the long term and, if the market rebounds quickly, possibly short term.
Outlook- Next 5 Months
The word to focus on in the next 5 months is volatility. We expect stocks to stage a few 10% rallies from June to September. We witnessed something very similar to this from May to June. These rallies may be followed by declines that lead us feeling as if we are going nowhere quickly. It looks to be frustrating as investors adjust to a new Fed cycle, the post-COVID business cycle and persistent inflation. These are periods that come and go for seasoned investors. They are normal and natural and help to burn off excesses that have built up during extended rallies.
Outlook- End of year
While we expect the stock market to be volatile for the next few months, we expect an end of the year rally. With continued solid economic data, interest rate hikes being absorbed by investors, and midterm elections completed, we may see a 4th quarter rally which helps curb some of the yearly loses. If momentum gains on the positive story line, it is possible we could see the SPX forging to positive territory and make a new all-time high by the end of the year or early into next year. Even with a potentially massive move upward, we are seeing the major research firms adjusting their forecasts for the S&P to end the year in negative.
Chart A1
