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Date: June 13, 2022

Not The Scenario I Wanted – Answering Your Questions

***Please note that I have started and stopped this update a number of times since I am on the road, so please forgive the pieces that may be a little stale***

I want to start off by addressing a comment and answering a few questions. First, a number of folks emailed why I didn’t send out market updates last week. I did. I just didn’t send notification to the entire list. Remember, I try to publish on the blog on Monday, Wednesday and Friday. I notify all those who ask. I try to email the full list every week or so. If you would like to be notified more often when I post something, scroll down on this page to the right side when you will find the green box Subscribe to our Blog.

It’s interesting that some folks don’t like when I publish lots of updates because that usually occurs when markets fall and they rather not be reminded. Other folks desire more information and want to know what’s going on and my take on it. No one is right or wrong, just how it is.

I compiled the top questions asked over the past few days to address here. Please know that I love to hear from you. Never hesitate to email or call with your questions or comments. Right or wrong, I am rarely short of an opinion.

Is the U.S. economy in recession?

Q1 saw negative GDP growth, but I viewed that more of an inventory anomaly than a shot across the bow. Q2 should see positive GDP growth. When 2022 began I wrote that I did not see recession in 2022,¬† but 2023 may be a different story. While the stock market is behaving like a recession is coming in 2022, the bond market is not. That’s likely because inflation remains stubbornly high. I do not think we are in recession right now nor will we be in the near future.

Is the stock market in a bear market and heading much lower?

I have always thought that labeling bear markets was either folly or worthless. And I am guilty of doing this. I feel this way because it seems ludicrous that a 19.90% decline is just another correction in a bull market while a 20.10% decline is a bear market. What’s the difference? How is that helpful? Some folks use an arbitrary low to define a bear market, like prices closing at their lowest levels in 18 months. That definition takes into account price as well as time. However, that also misses some hair-raising declines like the crash of 1987. If you held my feet to the fire I would now label 2022’s stock market behavior as a bear market.

The jury is still out on where price is headed. There have been too many indicators and trends that suggest another  meaningful will be here sooner than later. However, price is always the final arbiter and price needs to stabilize and behave better than it has been.

Should I sell everything now?

That is always the most popular question I get the longer and deeper a decline lasts. The short answer is that locking in losses prevents investors from making anything back when markets turn, which they always have in the past. Putting money into CDs or money markets does immediately stop the bleeding and makes people feel better right away. But it also does not give investors the opportunity to earn back what was lost. With inflation more than 8%, a low yielding CD will likely eat a good 7% of your buying each and every year.

What should I do?

Longtime readers know that I hate taking action based on emotion or from a position of weakness. 32 years doing this I have probably made every mistake possible and will make plenty more before my career ends. One thing I have learned is that selling into a vacuum hasn’t worked, at least for me and how I view the markets. My advice to concerned clients and investors during the really challenging periods like this is take a step back and confirm that your investing objectives are correct. It is natural for people to be concerned when portfolio values decline. However, when folks lose sleep or obsess or stay glued to the TV for every market move, that indicates a need to confirm the risk and objectives. For most, they confirm what they have. Some decide it’s time to take risk down half a notch or more. And some decide to add money or increase risk. There is no “one size fits all”.

 

The markets come back from a brutal close to last week in a rotten mood. Markets were correct as they began to worry about Friday’s CPI release on Wednesday and the selling accelerated on Thursday and Friday. Today’s open looks ugly. In all likelihood, the major stock market indices will fully revisit the levels last seen at the lows on May 20th. The trillion dollar question is “then what”?

I think it is too early to make that judgement. We want to see how price acts if and when it kisses the May lows. We want to see if the underlying market is stronger or weaker than a month ago. We do this by comparing things like the number of stocks making new 52 week lows, what percent of volume is in stocks going down, option trader behavior along with what indices and sectors lead and lag. Did volatility make a new high? Those questions and more will be answered in the coming day or so.

And remember that we have a Fed meeting starting on Tuesday and ending on Wednesday at 2pm. We already know that the Fed has been woefully wrong for the past 20+ months and Jay Powell & Company haven’t exactly endeared themselves to investors and the markets this year. The outcome of this meeting isn’t in doubt. Interest rates are going up again by at least 0.50%. The commentary and press conference will say it all.

My flight is about to land at JFK and it will be good to be home for the rest of June. Nothing like my own bed. I didn’t say pillow because I have found a way to travel with it now!

On Friday we bought and sold levered NDX and sold high yield bond funds.

Author:

Paul Schatz, President, Heritage Capital