As we are near the finish of the first half of 2022, most major stock markets have continued the ugliness that began right at the first of the year. As of Wednesday, June 22nd, the year-to-date numbers on the S&P 500 are near -20% and the NASDAQ 100 is down almost -30%. Even the AGG (Aggregate Bond Index ETF) is down close to -11%. (FastTrack Data)
The news now says that we are in “bear market territory,” which is defined as an index being down -20%. The thing is, this isn’t announced until after it has happened. It’s one of those data points that sounds interesting, but doesn’t give any insight as to how to think about your investments.
Even the Federal reserve is now admitting that we may be heading towards a recession. We have been saying it seemed likely for quite a while now. They’ve been behind on raising rates for over a year, so now it seems like they are playing catch-up. The last domino to fall, in our opinion, is when we see a shift to higher unemployment. Then recession should soon follow.
If unemployment does start to rise, then it is possible that the shift will swiftly change to an environment where jobs are hard to come by. I realize this would be quite a shift from where we are today – where an abundance of jobs are available. An Economist/Futurist friend, Jason Schenker, had a great post on LinkedIn about the job situation and a warning to newer college graduates. He says we’ve seen this before and we’ll see it again…and it will hurt.
The Federal Reserve did raise rates 0.75 in June, as we suggested they would in last month’s newsletter (even when most estimates called for 0.50). But as we’ve said before, they are still behind. We expect at least another 0.50 rise in rates at the next meeting in July…if not more.
There has been an interesting change in market leadership. The NASDAQ is back to being one of the stronger indexes (via Relative Strength) and this is only the second time we’ve seen that all year. It was briefly the leader in the recovery rally in late March, so it is possible we’re setting up for another one of those. We should note, in bear markets, you can easily see big relief rallies that make investors think the bear is done.
Our Shadowridge Mid-Term Cycle signal and Long-Term Trend signal are both back to negative. We continue to be largely in Cash and Money Market at the moment and are looking for reasonably safe funds to hold while this all plays out.
As of Wednesday night (June 23rd, 2022), our Shadowridge Dashboard showed Positive to Negative sectors as 0 to 11. That’s as ugly as it gets and the selloff we had last week was swift. There will potentially be some great set ups to get back in, but finding those entries right now can be tough.
For this month’s chart, I want to look at the comparison of the S&P 500 Year to Date (blue) vs the S&P 500 in 2008 (red). So far, 2022 has had one of the worst first six months in…ever. While we don’t expect this year to play out in the same way, it is a little ominous when you see the similarities in how the market moved in each year. Only time will tell.
Bonds – as of this writing, the Aggregate Bond Index AGG is down -11.94% YTD in 2022. The 7-10yr Treasury bond index is -11.74% this year (FastTrack Data). These asset classes are normally used as a diversifier or “safety net” from bad markets, but they aren’t holding up nearly as well as they should. And if interest rates continue to rise, these will continue to not work.
That can have a huge impact on those who want to retire soon, or have recently retired. The traditional 60/40 (stock/bond ratio) portfolio prescribed for retirees isn’t all it used to be. In the current environment, investors and especially retirees need something that works differently. If ever there was an environment that favored pro-active management, that would be now.
Bottom line – we continue to be largely out of the market, and expect to remain so for a little while going forward. Short term opportunities may pop up and we will be watching for them. We also continue to utilize our Market Neutral thinking in several of our strategies, which can help bring some positive spots even in declining markets. But our main focus now is on protecting principal. As always, we don’t want you to experience a life-altering financial crisis, so we continue to be diligent in watching our clients’ investments.
Stay safe out there!!
Don’t forget to catch our monthly webinar, where I dive deeper into what I have mentioned in this newsletter commentary. For me, nothing tells the story as much as visuals, so I really enjoy the webinar for digging into what we’re doing with investment decisions. Will, Phil, and Laura will also be presenting timely topics to help you face life’s financial challenges and opportunities. We hope you can join us – Thursday, July 14th at noon Central time.
You can sign up for the webinar here. We look forward to seeing you there!
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1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.