The bull market that began in March of 2020 came dangerously close to an end. From March 23, 2020, through January 3, 2022, the S&P 500 Index gained 114% (excluding dividends). From that January 3 closing high through the recent low on May 19, the S&P 500 fell nearly 19%, narrowly avoiding the level at which bull markets end and bear markets begin.
While we wait uncomfortably to see if the S&P 500 can hold its recent lows, it is somewhat reassuring to know that bear markets that are not accompanied by recessions tend to be milder:
Bottom line, if the U.S. economy is able to avoid recession over the next 12 to 18 months—as we expect—then this selloff may be over soon, and stocks could potentially make a run at their previous highs by year-end.
That doesn't take away from the increasingly challenging environment consumers and businesses are facing as sky-high inflation shows few signs of relenting. Recession risk is rising, increasing the chances of a larger decline—the average recessionary bear market decline is 34.8%. The Federal Reserve has taken away the punchbowl, giving markets a hangover. The cure is lower inflation, but it will take time.
Those who believe this environment is like the 1970s, 2000-2002, or 2008-2009, may want to consider more defensive positioning of portfolios. Those are the types of environments where some companies don't survive. But if the economy stabilizes as the Fed hikes rates to tame inflation—the so-called “softish landing” Fed Chair Powell aspires to achieve—then the best path forward may be to ride this out. Market timing is hard. The sharpest rallies tend to come during bear markets and are costly to miss for long-term investors.
Investors are anxious right now and understandably so. Legendary investor Warren Buffett tells us that situations like that are an opportunity to be greedy, not fearful. Sir John Templeton, another legendary investor, tells us bull markets are born on pessimism (and grow on skepticism, mature on optimism, and die on euphoria). Well, we have a healthy dose of pessimism right now to provide fuel for the next rally.
Buffett's advice makes sense but is difficult to follow in practice. For those who can fight off the temptation to sell when stocks are down and have an investing time horizon spanning more than a year or two, history suggests you will be positioned to do well. Bear market recoveries prior to record highs take 19 months on average. When not accompanied by recession, they take just seven months. From a long-term investing perspective, that's not long to wait. Please contact me if you have any questions.
David S. Dixon, CFP®
Tracking # 1-05286775 (Exp. 06/23)
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of June 1, 2022.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn't provide research on individual equities.
All index data from FactSet.
The Standard & Poor's 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
2022 has been a challenging year for investors so far. The S&P 500 Index just had one of its worst Aprils in decades, and May is off to a rocky start. Bond investors have not fared much better as rising interest rates have pushed down bond prices. Bond losses have made the stock market volatility feel even worse than usual. Markets don’t like uncertainty but it’s getting a healthy dose of it this year, dealing with high inflation, tighter Federal Reserve monetary policy, COVID-19 shutdowns in China, and snarling global supply chains, all while the war in Ukraine continues.
Investing mistakes often take place during periods of elevated volatility. One of the most frequent is trying to time the market by jumping in and out. Market timers must be right twice and timing the return to the market can be extremely difficult to pull off. Markets can turn quickly and missing even just one big up day can significantly reduce returns over time. The biggest daily gains tend to come in down markets, making them especially difficult to predict. Time in the market, not timing the market, may be more beneficial to long term investors.
When markets are shaky, it can be helpful to look to long-term fundamentals that have provided the foundation of positive returns for stocks and bonds over the long run. For stocks, gains depend on the ability of corporations to grow earnings, which they have continued to do during first quarter earnings season—S&P 500 Index earnings per share are on track to increase 10% year over year. For bonds, the key fundamental has simply been the ability of borrowers to make required payments. Corporations and consumers enjoy strong balance sheets and have the financial firepower to pay their debts. While the future is always uncertain, we believe those fundamentals remain in place.
Even against a potentially supportive fundamental backdrop, the volatility we’ve seen in stocks this year is not unusual. Although negative returns for a full calendar year are infrequent, corrections are fairly common. Since 1980, the S&P 500 has been negative for a calendar year just seven times, but the average decline within any year has been 14%. Mid-term election years have tended to see increased early year volatility, as the honeymoon period for a new president ends and political uncertainty rises. Inflation can also be challenging. Years with inflation over 5% have seen more frequent stock market declines than a typical year, but stocks have still been higher more often than not.
Amid the global economic and geopolitical uncertainty, the core domestic economy is still quite stable. Weekly consumer spending data is above typical baseline levels. Job seekers are participating in a tight labor market with twice as many openings as unemployed people. Businesses are enjoying high profit margins despite cost pressures. The economy is expected to grow in the latter part of this year after a surprise contraction in the first quarter, though the growth path may be bumpy as monetary policy is recalibrated from exceedingly loose to moderately tight and consumers and businesses adjust to higher borrowing costs. Our base case is still for above-trend economic growth in 2022.
We believe patient investors stand a better chance of meeting their long-term goals. No one has a crystal ball, but at lower valuations, history suggests the chances of above-average returns going forward may be rising. It’s tough to do during times like this, but we encourage long term investors to stick to their game plan.
Please contact me if you have any questions.
David S. Dixon®
Tracking # 1-05279947 (Exp. 05/23)
All data is provided as of May 9, 2022.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
As we move into spring and leave behind the last signs of a long winter, many worries from a chilly start to the year for markets, unfortunately, are still with us. The S&P 500 Index had its worst April in more than 40 years, leaving the index down over 13% for the year. Previously highflying stocks have come back to earth, with many of them cut in half or more. And bonds, which have historically provided support during times of stock market volatility, have done little to protect portfolios.
The concerns that have contributed to the poor start are well-known. Historically high inflation, supply chains disruptions, China in another lockdown, geopolitical concerns, an aggressive Federal Reserve Bank (Fed) rate hiking campaign, and soaring yields have all contributed to the worries. Not to mention economic growth worries are spreading after the 1.4% decline in gross domestic product (GDP) during the first quarter.
Just as April’s dark storm clouds are often chased away by a brighter May, we remain optimistic that more sunshine could be coming. Yes, the GDP report showed an economy that contracted in the first quarter, but that was mainly due to drags on inventory and trade, while more important parts of the economy like consumer spending, housing, and private sector investment all accelerated compared to the fourth quarter. Additionally, 2011 and 2014 both saw negative first quarter GDP prints, followed by big rebounds in the second quarter to avoid recessions. We expect GDP to grow approximately 3% this year and avoid a recession thanks to a strong consumer and a healthy corporate earnings backdrop.
Inflation could be nearing a peak, offering a potential driver for improved confidence in the second half of this year. Used car and truck prices have come down significantly over the past two months, while shipping costs have also dropped nicely. These two bits of data suggest inflation may be past its peak, even if it may take a while for it to get back to normal. Add in supply chain normalization and the potential for a ceasefire in Ukraine to remove some upward pressure on commodities, and the Fed may not hike rates nine times as the bond market is currently pricing in. From its early January peak, the S&P 500 has corrected 13.9% (as of April 29), right in line with the average yearly correction since 1980 of 14.0%. As uncomfortable as this year has been, this action is actually about average. Additionally, midterm years tend to be even more volatile, correcting more than 17% on average, but the index rebounded 32% on average in the 12 months following those midterm year lows. Lastly, the last 21 times the S&P 500 has been down double-digits since 1980, the index rallied back to end the year positive 12 times. Don’t give up hope yet.
The investing climate is quite challenging, but based on historical trends, we believe patience may be rewarded. Even if there may be some downside in the short term, consumer and business fundamentals remain supportive. Strong profits and lower stock prices mean more attractive valuations, and current levels may end up being an attractive entry point for suitable investors.
David S. Dixon CFP®
Tracking # 1-05275942 (Exp. 05/23)
All data is provided as of May 3, 2022.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy
Recently the yield curve inverted for the first time since August 2019 (which means that long-term interest rates have dropped below short-term rates).
Why do we pay attention to this?
Because this inversion suggests that investors believe the near-term economy and markets to be riskier than the long-term.
This recent inversion in the yield curve and inflation soaring above 7% have left some investors wondering whether to adjust their investment strategy. While it can be tempting to worry and want to rush and make changes, the current environment is cause for monitoring, not cause for panic.
Yes, rising interest rates, high inflation, surging oil prices, and geopolitical tensions have all contributed to economic uncertainty. And because financial markets don't like uncertainty, they have been performing accordingly.
U.S. inflation clocked in at 7.9% for the 12 months ended February 2022 — the highest rate since December 1981. Energy prices, already on the rise, jumped when Russia invaded Ukraine. In response, the Federal Reserve started raising interest rates, hoping to slow the economy without triggering a recession.
Higher interest rates can be negative for the stock market, as the cost of doing business rises for companies, potentially impacting their growth rates. However, Bloomberg data shows that in each of the last eight hiking cycles, the S&P 500 was higher a year after the first increase.
Of course, past performance is never a guarantee of future results, but the data suggests staying the course.
Fixed-income securities are particularly sensitive to interest rate increases due to the inverse relationship between bond yields and prices. Despite increased short-term volatility, it's important to remember the role fixed-income plays in your portfolio – diversification, preservation of capital, and guaranteed income.
So, in a nutshell, stay the course.
As your financial advisor, I'm here to help you navigate these choppy waters and keep you on track to meet your goals. Rest assured, I will continue to monitor your investments and make adjustments if necessary.
If you have questions, you know I'm just a phone call or email away.
Talk to you soon,
WOW! Can it really be 2022, we can't believe it was over two years ago that a Global Pandemic was upon us…are we starting to see light at the end of the tunnel? Even though the threat of COVID-19 seems to be decreasing, these turbulent times we are experiencing still have some seeing the light of a train instead of daylight at the end of that tunnel. Yes, there have been some rocky roads and a few more may lay ahead, but we do believe that it is "daylight"" we are seeing, not a train.
We ask that you hold on and take the roads as they come, because smoother roads are around the corner. We are with you in this journey as a passenger, along for the ride and we want you to get to your destination feeling secure and accomplished.
Dixon Financial Group, LLC and the website are going through some changes and updates, and in the near future we will have the pleasure of introducing you to two new team members: Autumn Shane and Tamara (Tami) Schnieder. Pictures and bios coming soon. Tami is doing some "Spring Cleaning"" on the website and we will be excited to show our client's and anyone visiting, our spruced-up website. Watch for updates!
We said "Goodbye"" to Susan, as she retired in 2021; we wish her all the best and miss her greatly. Taylor started a family and has decided to be home. This opened the door for the two new team members we mentioned above. We are excited for the future, working together and with our clients.
It is our hope here at DFG that all of you, clients and future clients are well and that you know we are here to answer all your questions and to be that passenger riding alongside you during your financial journey. Clients will soon be receiving another "text"" from Tami with an invite to visit our revamped website, we would appreciate any feedback you may have, feel free to message us through the website. Keep a lookout for the next "text"" coming in about a months' time.
Before you go, make sure to click on the "Blog"" tab on our "Home"" page. This will be another avenue of communication we will be updating on a very regular basis.
The Staff at Dixon Financial Group, LLC