Down Month, Down Quarter, Down Year- When Do We Get a Break?
A tough year to be a stock investor! The closely watched S&P 500 Index is down 9.2% for the month, 4.9% for the quarter and down 23.9% on the year, but is still up 54.5% for the past 5 years.
We forecast gains of 4-6% for the S&P 500 in 2022 back in January. To accomplish 4% by year end, stocks would have to rally 36.7% in three months. A rally of that size is just NOT going to happen with interest rates still on the rise.
Investors remain convinced that the combination of residual COVID issues, the Russian war on Ukraine, supply chain disruptions, high inflation, high energy prices and rising interest rates GUARANTEES a steep recession in the US. We acknowledge all those issues, but until we see actual evidence of recession in the US labor markets (the unemployment rate remains at generational lows, the number of employed Americans just eclipsed the previous records) and company revenues and earnings, we’re just not agreeing with the consensus.
Right now, as we add new families, we are taking them 100% invested.
Is that crazy? We rely on two helpful indicators.
The first is the CNN Fear and Greed Indicator, which is a contrary indicator.
At present, investors are terrified and vomiting up their stocks, which creates a buying opportunity for us.
The other chart we rely on is the Morningstar Market Fair Value calculation. Each month, Morningstar’s analysts determine the “fair value” for 3000 companies compared to actual stock prices and create a weighted average to determine if the overall stock market is over or undervalued.
For example, Morningstar has determined that Microsoft is currently 34% undervalued:
At present, Morningstar evaluates the stock market as 20% undervalued:
As we look at this chart over the past 15 years, we see that EVERY time stocks are undervalued, it was a great time to be a buyer.
Stocks moved up sharply from June 15th-August 15th, sold off again in recent weeks. I expect that we’ll get another rebound into year end.
The worst bear market in the last 40 years was 2008-2009, down 55% in 6 months (versus the current down 23% in 9 months.) By the end of 2011 (three years) US stocks were at a new all-time high.
This chart shows the amount of time we are in bull market (grey) versus bear market (yellow.)
About 90% of the time, we are in bull market mode Markets tend to go up over time—after a drop 20% or more, the average accumulative rate of return is 41% over the next 3 years and 71% over 5 years.
In March, 2020, the arrival of the COVID pandemic caused the stock market to fall 30% in a month. The country and world were an absolute mess. Yet, markets recovered and ended the year with gains. Current headlines are scary—we know that the media makes money by scaring people. But, the market doesn’t know about wars and politics, only responds to company revenues, company earnings, and prevailing interest rates. Over the past 55 years, there have been 14 bear markets, an average of once every 3.9 years. Each bear market lasts an average of 9 months (we’re already 10 months in) and take an average of 19 months to recover to new highs.
We wish we could tell our clients EXACTLY the moment this bear market will end. While we’re waiting, any clients with cash not set aside for immediate needs should give us a call. Any clients depending on their portfolio for retirement income should rest assured that we have NEVER had to cut anyone’s monthly draw because of market downturns, and we don’t expect to start now.
David Edwards is president and wealth advisor with Heron Wealth, a $500 million registered investment advisor based in New York City working with 225 client families across the U.S. and around the world.
At time of publication, Edwards and/or his clients held positions Amazon, Apple and Google.