By: Ryan P. Johnson, CFA, CFP® - Director of Portfolio Management & Research
Fear should not drive your investment decisions. To paraphrase an old adage: we should strive to accept the things we cannot change, have the courage to change the things we can, and the wisdom to know the difference. As of the time this was written, the S&P 500 was in correction territory, down more than 10% from the highs set at the start of the year. Bonds have not had an auspicious start to the year either, as higher interest rates have pushed prices lower (think of rates and prices as opposing ends of a seesaw). Corrections are common; a drawdown of 10% or more for the S&P 500 has happened in 12 of the past 20 years. Stock valuations are, in part, a vote of confidence. If investors become less confident in an outcome, a lower price (relative to earnings) will be paid.
RUSSIA’S INVASION OF UKRAINE
Reasons for the sell-off are well known, with Russia’s invasion of Ukraine causing many effects: increased uncertainty, higher volatility, higher commodity prices as sanctions on Russian goods impact supply/demand balances globally, higher inflation, higher interest rates due to higher inflation expectations, and lower corporate growth and earnings estimates. Oil recently hit multi-year highs as global supply chains are re-routed and the supply shock of less Russian oil has resulted in higher prices. Hopes that we would soon see a slower rate of inflation have been pushed further down the road because of higher oil and grain prices and corporate profit estimates are likely to decelerate. With many businesses shutting operations in Russia or cutting ties with Russia, we believe this is a permanent shift in relations that will have long-lasting impacts on global trade and power dynamics.
Also creating a headwind for asset prices, for the first time in over two years, the Federal Reserve has moved from easing (increasing money supply) to tightening. The Fed has a difficult situation on its hands, trying to curb inflation while also not being so restrictive as to stifle growth or cause a recession. A year from now the Fed Funds rate could be over 2% according to the futures market, but there many variables that will need to play out to get there.
“DEATH CROSS” TECHNICAL INDICATOR
In case you have seen a recent headline about a technical (chart) indicator called a “death cross,” we would like to point out that this has often been a contrarian indicator over the past 20 years. The “death cross” occurs when the 50-day moving average (average price over the past 50 days) moves below the 200-day moving average. Some believe this is an ominous signal, but it is actually reflective of what has happened in the past, not necessarily what will happen next. With the most recent “death cross” having just occurred for the S&P 500, this is the tenth time in the past 20 years this has happened. In seven of the previous nine occasions, the market was higher one year later, with a double-digit percentage gain in each of those seven occasions.
Looking at recent credit card spending data, U.S. household spending so far seems resilient, but the dynamics could quickly shift if the national average price of gas were to increase to over $5 per gallon from the recent level of $4.33. However, it is not all bad news in the economy; national unemployment just registered a cycle low of 3.8%. In addition, stock valuations have become more attractive as the S&P 500’s forward price-to-earnings ratio is near its 5-year average.
WHAT TO DO NOW
To take a longer-term view, we have carefully planned for our clients’ allocation to stocks so we do not need to fear when markets decline and can avoid being forced to sell low to meet cash needs. To reiterate a crucial point that we have talked about many times in the past, we do not try to time the market. For the long-term, meaning more than 5 years, we would rather be buying than selling today. Recent uncertainty has led to lower prices in the short-term, but we are still expecting earnings growth in the stock market overall this year and next, which helps support prices. We like to focus on what we can control, and we try to spot opportunities in a down market.
BUCKINGHAM IS HERE FOR YOU
While Buckingham Advisors continues to grow thanks to introductions from our valued clients and strategic partners, our focus remains on serving each family, each business, each foundation, with special attention to what matters most to each client. If you found value in reading this edition of Market Insights, please send this issue to them. If you or they would like to be in touch directly, here’s a link: https://mybuckingham.com/contact.
Thank you for your continued trust and support.
Ryan P. Johnson, CFA, CFP®
Director of Portfolio Management & Research
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.