Date: May 9, 2022

Strong Selling Wave Continues – Plenty of Opportunities

Good Monday Morning. The weather may finally turn nice in New England, but the markets begin the new week in the same crummy mood as last week and the week before that. And the story remains the same. Higher interest rates. Less confidence in the Fed. Inflation. The correction has been sharp and swift and painful with few places to hide.

What different about this one is that the bond market’s decline has much worse on a relative basis. Bonds have been decimated to the magnitude not seen since records have been kept. That’s how crazy the fixed income market has been. Commodities have been less injured, but that is unlikely to be the case today.

On a risk adjusted basis, although I do believe the stock market is going to bounce strongly soon, bond offer a better opportunity through year-end. While stocks could have a series of 10% rallies, I do not think bonds will have a single 10% one. However, when you factor in volatility, bonds are likely to perform better.

Getting back to the stock market, it clearly remains in the throes of a strong selling wave, the likes of which we haven’t seen since March 2020. By my count, today will be the 28th day and that’s at the tail end of what have seen historically. At the worst of it in 2008 I think the Lehman wave last about 30 days.

The decline is long in the tooth, but that doesn’t mean it has to end today. I had hope to share a bunch of data, but the weekend got away from me with my son’s long-awaited, bar mitzvah party and family and friends in town.

Take a look at the Volatility Index or VIX below. As you can see, the VIX peaked on January 24th when the markets bottomed at higher levels than today. Each successive lower low in the the stock market in February, March, April and May did not see the VIX spike above the January peak. That’s normally a sign of waning downside momentum although enough people have opined that the stock market needs the VIX to spike above 40 to wash out all the sellers and clean this mess up. That’s not how it has to happen and did not happen that way in March 2020 although the VIX did find a low along with stocks on Christmas in 2018.

Let’s see if the bulls show up for Turnaround Tuesday. Any one of these Tuesdays, Wednesdays or Thursdays could be a decent spot for a strong bounce. The carnage has been very palpable, especially in the NASDAQ and the most beaten down should get a reprieve.

Regardless of getting this correction right or wrong (we have strategies that have been super successful as well as dismal), there are always opportunities. And there are many right now. Always remember to use declines as tax loss harvesting opps as well as ROTH conversion considerations. It pains me to hear that so many other advisors don’t strongly recommend to clients or hide when losses mount. It’s part of investing. If this or any correction bothers you too much to handle, then it’s a good idea to revisit your investment objective and stress test your portfolio. Also, make sure your overall retirement and financial plan is solid. In the end, never sit around hoping things change. There is usually something to do or at least confirm where you are.


Paul Schatz, President, Heritage Capital