“To conquer frustration, one must remain intensely focused on the outcome, not the obstacles.”
T. F. Hodge
Headlines are a poor planning tool for anything. Even the major news organizations don’t get it right, certainly not all the time. They quote famous people and try to sell their product, and all too often emotions are formed, impressions develop, and decision are made. Most headlines are from credible sources and quote credible people, but they are not looking at leading indicators and consumer trends and the host of other factors we look at every day. The financial media tends to report the bad news and gloss over the good news. The real pain in the market has been suffered by riskier sectors, like technology. We might see continued weakness in this space, but when the weakness starts to fade, and recovery comes, it will come quickly.
Financial markets have experienced increased volatility this year due to geopolitical conflict, inflationary pressures, tightening monetary policy, and elevated valuations. On May 26, 2022, the S&P 500 was down 20.93% and as of this writing, the S&P 500 is down 20%. In June the S&P 500 moved higher at the start of the month and then proceeded to re-test the May lows in the S&P 500. The current recession fears deepened in tandem with the most aggressive Federal Reserve rate hike since 1994. If we are in a recession, we’ll know by the end of July, when the 2nd quarter GDP is reported. The definition of recession is two back to back quarterly declines in US GDP.
While the situation is improving, we feel the markets will trade in a range until we get more clarity regarding inflation and economic growth. We are assuming the current decline is a non-recessionary market decline as the Fed raises rates and starts quantitative tightening to combat inflation. Quantitative tightening, which means the Fed will not reinvest the proceeds of the securities that are maturing and held by the Fed. The Fed’s balance sheet holds close to 9 trillion dollars of bonds and they plan to sell them from now until 2028.
I know this sounds like a broken record, historically, by the time the indices are down 20% we’re more often than not already close to some sort of bottom and the time to sell has passed. That’s not always the case, of course, but it happened in 2011, 2018, and 2020. The ink was barely dry on the “BEAR MARKET” headline before stocks starting going back up. There are obviously plenty of reasons to be concerned right now, but some specific percentage decline threshold is not one of them. I understand that the violent moves make everyone nervous and the media doesn’t help with all the headlines about how the current bull market has ended. The 2008/2009 crisis was a credit crisis and the current indicators don’t point to the same credit stress levels as 2008. These same comments showed up in December of 2018 and 2020.
Getting out of a market decline is easier than getting in. In my experience, even those lucky enough to get out and avoid some of the down move are unlikely to get back in, in a timely fashion. Most often, I see them get back in at levels well above where they got out of the market.
-Stocks are often up substantially within 60-days of bear-market lows (+22% in recessionary bear markets and +17% in non-recessionary bear markets.
-The news is often still very negative within 60-days of bear market lows.
-Most recent example, 60 days after the March 2020 low, the S&P 500 was up 33%. The news of the virus was still very negative and uncertainty was at an extreme.
(Mike Gibbs, Managing Director, Equity Portfolio and Technical Strategy)
Valuation: The forward 12-month P/E ratio for the S&P 500 is 15.8. This P/E ratio is below the 5-year average (18.6) and below the 10-year average (16.9).(Factset earnings insight)
For CY 2022, analysts are projecting earnings growth of 10.4% and revenue growth of 10.7%. Looking ahead, analysts expect earnings growth of 5.8% for Q3 2022, and 8.5% for Q4 2022. For CY 2022, analysts are predicting earnings growth of 11.7%.
Targets & Ratings: Analysts Project 31% Increase in Price over the next 12 Months
Manufacturing production is up at a 6.6% annual rate, nonfarm payrolls are up at an average monthly pace of 488,000, and the unemployment rate has dropped to 3.6% from 3.9%. Meanwhile, in April, both "real" (inflation-adjusted) consumer spending and real personal income (excluding transfers) were at record highs. If this is a recession, we could use more recessions.
It's also important to recognize that real gross domestic income (real GDI), an alternative measure of economic output, rose at a 2.1% annual rate in the first quarter. The public pays very little attention to GDI because the government usually takes an additional month to report that data, after GDP is initially released. But, over time, GDI is just as accurate as GDP in describing the performance of the economy. (Brian Wesbury-Chief Economist, First Trust )
Powell testified before the Senate Committee on Banking, Housing, and Urban Affairs on June 22.
“The American economy is very strong and well-positioned to handle tighter monetary policy,” he said. He also noted that the war is creating some aspects of inflation that are beyond the Fed’s control, namely fuel and food. When queried about rate increases leading to a recession, Powell said that it was “certainly a possibility” but not the Fed’s “intention.”
This is a great example of headline news potentially leading people astray. While Barron’s led with the strong economy, Bloomberg’s headline was that, according to Powell, achieving a soft landing would be very “challenging” and that a recession is possible. We are constantly assessing and reassessing the implication of the rising interest rates. Please keep the following in mind:
(ITR Economics)
To reiterate, I do not think we are going into a recession, but the economy is clearly slowing. I believe this is perfectly normal following the type of economic expansion we have had over the past few years. The S&P 500 reflected the economic slowdown by pulling back ~20%. It’s probably a good time to remind everyone that the 20% decline threshold itself doesn’t really mean anything. It’s an arbitrary number and the only purpose it typically serves is to spook the unknowing public into making poor, emotionally-based investment decisions.
Since early 2020, the US has experienced the shortest and sharpest economic Depression/Lockdown in (at least) modern history, paired with an enormous expansion in government spending that is now receding. The stock market has suffered a heart attack and just like a heart attack patient does not get right up off the gurney and run the 100-yard dash. It is doubtful the stock market will do that either. It should take the markets time to convalesce before staging a decent rally-we remain in a secular bull market despite the recent sell off.
As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor. I’m here to assist you and to answer any questions you might have in regards to financial planning, the markets or walk through any issue that concerns you. As always, thank you for the relationship and trust.
“Don’t fight the Fed.”
Harry S. Williamson, WMS
First Vice President, Investments
Financial Advisor
Any opinions are those of Harry Williamson and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S .stock market.
Prior to making an investment decision, please consult with your financial advisor about your individual situation.
