Quarterly Re-Cap; Bear Market Hope

Summer ended, Autumn commenced, and the first 9 months are now past history on the annual calendar.

Financial markets were again in the doghouse for the 3^rd quarter, with stocks, bonds and Gold all lower by varying degrees. Add to that inflation’s persistently high levels and five interest rate hikes by the Federal Reserve this year (two in the third quarter), that should tell you that the headwinds are still in place for subdued stock and bond market gains.

If you let the market’s direction dictate your emotions, you’ve probably needed counseling or therapy this year. The volatility has been immense! Consider: Stock prices (Dow Jones and S&P 500) fell 19%-23% from their all-time highs set in early January.

Then from the mid-June lows; they rallied 14%-17% into mid-August; then fell again 16%-17% into late September. Many individual stocks fell much more. Wow.

Then, about the time you were going on-line to check your September month-end brokerage or retirement account balances, the market shot up like a NASA rocket +6% in just two days this past Monday and Tuesday. How the heck do you handicap all that?

So what did work this year in the stock market? Not much. The winning categories were few and far between. Of the 11 Sectors of the market into which all stocks are placed, only ENERGY made money in the first 9 months; about +35%. That’s it. For the third quarter alone, top performers were again Energy +4%, followed by Consumer Discretionary +4%, Financials -3%, and Health Care -5%. In this environment, losing less is a success.

For instance, the price of Gold and Utility stocks are down 8% each this year, while Technology and Real estate stocks are down 30% ! It takes a lot less of a gain to recover from a 8% loss than a 30% loss; a LOT less.

If you tossed your money into an index or exchange-traded fund like the Dow Jones (DIA) or S&P 500 (SPY), you lost 5% to 7% in the 3^rd quarter and are down 21-24% on your money year-to-date. Hand me the Bromo-Seltzer.  

On interest rates; they have continued higher most of 2022 with the five Fed rate hikes mentioned above. The 10-year U.S. Treasury Note’s interest yield this year shows a steady rise from 1.5% to 3.8% currently. That’s more than a double, and it’s starting to slow down our economy which is closely tied to our costs to borrow money and balance our household budgets.

On the saver’s side of the ledger, CD’s, money market funds, Treasury bills and fixed annuities are paying a LOT more. 

Here are the U.S. Treasury and CD rates as of today reported by Fidelity Investments.

These are annual rates based on the maturity of the CD/Bond. $100,000 invested in a 6 month Treasury Bill would earn $320.00 per month.

So what to make of all this gloomy news I am reporting?

Hope. Because the United States economy is the strongest and the most resilient economy in the world. This is true for our financial markets also. The ‘Bear Market*’ that stocks are in now since this past January, is the 11^th bear market since mid-1957. That’s 65 years ago.

Each time the economy recovered, and company profits and stock prices marched upward. Depending on your age now, you may not have lived through some of those earlier bear markets in ’62, ’66, ’68-70, ’73-’74, ’80-’82, and 1987. I started in this business in 1982, joining my father's investment advisory. The Dow Jones Average was 777 then.

Recent events over the last 20 years include: 2000-2002 the bursting of the Dot-Com bubble (49% loss); the 2008-2009 global financial crisis (55% loss), the 2020 Covid-19 Pandemic (a quick 33% loss), and then this year’s bear market of -24% peak to trough (so far). Each bear market unfolds differently, but they all end!

Interestingly, the Covid-19 bear market lasted just one month, and then stock prices were off to the races; doubling in the next 22 months (to Jan. 2022). If you throw out the brief Covid bear market, the average ‘bear’ lasts 14-1/2 months and is a 35% loss; that would put the end of this one near March, 2023 near Dow Jones 24,000. That forecast has lots of wiggle room folks. Don’t hold me to that please.

It's important to know market history to understand what COULD happen again.

I think it is more productive to concentrate on how much you own in stocks, bonds, gold and cash vs. trying to handicap the ups and downs of the prices. If the general direction is UP over your investing "career", then own some stock, some bonds, some Gold.

I’ll re-gigger a prior post on that and get it out to you soon on how to quantify your risks using stocks, bonds, Gold and cash.

Give me a shout-out if you have any questions on any of this.

  ~Barry

* a decline of 20% or more

 

June Quarterly Markets Review

The financial markets continued a very volatile second quarter, on top of the first three months. The large market indexes fell double digits: S&P 500 down 16%, Dow Jones Industrials down 11%, and NASDAQ Composite off 17%. Assets outside of stocks did not hold up well enough overall to mitigate a balanced portfolio’s drawdown in value. Individual stocks often fall more that the averages; Apple shed 21% in the quarter; Warren Buffet’s Berkshire Hathaway stock fell 22%. The chart below shows the S&P 500 Index for the past year; with the December high and June low highlighted in yellow. That shows a 24% decline in price from peak to trough.

Bonds fell along with stocks, as the three interest rate hikes by the Federal Reserve since March re-priced bonds for the higher market rates (when interest rates rise, bond prices fall). Corporate bonds shed 7-8% in price, while U.S. Government securities felt the pain also. On the interest rates, a 3-month U.S. Treasury Bill paid 1.70% at June’s end, vs. about zero (0.05%) New Year’s Day. The 10-year Treasury Note now pays 3.00%, up from 1.50%, a double. Here's a table of the closing U.S. Treasury yields and Bank CD's also on July 12th.

 While buyers of fixed interest investments: Bills, Bonds, Annuities - finally see some hope for interest earnings, borrowers are on the down-side seat of that teeter-totter. Everything from auto loans to mortgages to credit card rates have ratcheted higher in the past 6 months. While existing home sales prices have ballooned to an median average $407,000 last month, home affordability is disappearing for many Americans, especially first time buyers.

On that point, the 30-year fixed mortgage rate for borrowers is now 5.50% – 5.75%, way up from the average of 3% for all of 2021; that’s an extra $450-$500/month for a $300,000 loan! That’s a tough nut for many homebuyers to crack, especially since the cost of most all of life’s needs are running hot: food, gas, travel to name a few.

If the goal of the Fed is to tamper demand to lower asset prices (inflation), that just may work. Inflation is expected to stay around 8% year-over-year for the next report, due out tomorrow, (July 13^th @ 8:30 a.m.), so keep a close eye on that.

Historically commodity prices tend to rise when inflation heats up. Oil and Gas prices have risen quite steadily this year. The only market sector that made money through mid-year was Energy. Our long-standing position on owning Gold continues to be in-force. Gold has NOT performed well enough to offset much of the stock and bond losses. Gold reversed course the past three months. After a $135 gain in quarter one, it gave most of that back, -$125, in the second quarter. Year-to-date, Gold gained just $11 for the six months, to $1,817 / ounce. 

The best way to frame it is that Gold held steady and did not lose money, so any allocation to Gold helped your overall performance of your stocks, bonds, Gold and Cash holdings. As covered in last quarter’s market recap letter, we were pretty excited to see Gold rally past the $2,000 mark to $2,070 in early March as Russia invaded Ukraine, but that rally quickly faded. Lastly, year over year ending June 30^th, Gold gained 3% in value while the stock market sold off 9% to 11% on the Dow Jones and S&P 500. Gold can erupt with big moves, so we’re patient owning Gold as part of our portfolios.

So what does this mean for our investments as this bear market (a 20% decline) unfolds? First, all bear markets end. The average downturn is about a 35% decline (since 1957), so we  Also, the average bear market lasts about 13 months. BUT, averages can be very deceiving since all bear markets unfold differently. The 2000-2002 bear market was 30 months, while the 2020 bear market (COVID-19 related) was just 33 days! The 2007-2009 bear market took 17 months to complete. If we toss out the 2020 oddity, we’re looking at 14 months normally; that would take us to about February-March, 2023, but I don't have space here to list all the ways that could be really inacurate.

Lastly, the time spent in market downturns or Bear Markets is small compared to Bull and Non-Bear Markets. In the 65 years measured since July, 1957, we were in a Bear Market just 17% of the time. A full 83% were spent in either sideways or Bull markets. That’s a stat I wouldn’t want to bet against as an investor and stock-holder.

If you are a long-term investor, and not a trader, I advise to set your allocations to your investments where you feel comfortable; Stocks, Bonds, Gold (or commodities) and Cash, and then add to them over the next 6 months if you can, reviewing them at year-end. This could well be a transition year where we see little gains or appreciation from the lows set in mid-June.
If the June low’s hold near S&P 500 3,666 level, then the Bear may be finished at just 6 months. But we’ll need a big 30% rally from the June S&P low to get back to the all-time market highs set in late-December 2021. That’s a tall order, so we’ll stay alert and keep invested so we don’t miss the start of the next BULL market.

Thanks for reading.
~Barry Unterbrink
Unterbrink@usa.net