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Hope all is well with you.   Thoughts and prayers to all those in the Buffalo community. Racism has no place in our world.   It is Peace Officers Memorial Day and Police Week, and we don’t say thank you to our law enforcement officers often enough, so thank you. Despite a massive rally on Friday, the losing streak for the Dow extended to seven weeks. It’s now the longest such string for that index in decades (1980). While the S&P 500 and NASDAQ fell for the sixth week in a row. Each index dropped around 2% to 3% and the S&P 500 retreated to its lowest level since March 2021. As of Friday’s close, the S&P 500 was down more than 16% from its record high in early January and the Dow was nearly 13% lower. The NASDAQ was off almost 27% from its record set last November. It’s the worst start to a year since 1932. So rather than break down this week’s news.  I figured I would answer some of the more common questions many of you have.

Why is the market down and how much lower will it go?

The market drop this year has been caused by lingering inflation, monetary-policy tightening, continued Covid related shutdowns in China, and heightened geopolitical risks particularly in Ukraine.  All of these factors have caused investor sentiment to remain extremely negative.  We are on the cusp of a bear market drop.  This usually implies a high probability of a recession. As I mentioned last week there have been two such drops in the last 60 years that were not followed by a recession.   I am of the opinion this could be the third.  In each of those cases the average drop was down 28%. In one of those two drops, 1966 it only took 7 months to recover.  The other 1987 triggered the longest bull market in the history of the stock market.  I don’t think we are done dropping but the bottom could happen soon.  Investor sentiment tends to be a good contrarian indicator, panic and pessimism tend to signal market bottoms. When the VIX, a measure of market volatility, has spiked (reading over 40) in the past, it has been followed by strong stock market returns. Similarly, when less than 20% of stocks have traded above their 200 moving average, markets have tended to rebound. The VIX index is currently at 33, and 22% of the S&P 500 stocks trade above their 200 moving average, so we may be closing in on a market bottom.

What about my new contribution into my 401k and other investments should I be more conservative?

You shouldn’t cut contributions or change your future allocations to retirement accounts during down markets. In the long run, you will benefit from buying new shares at lower prices and will achieve a lower net average purchase price. If you’re in retirement, only the portion of your money you won’t need to spend in the next three to five years should be in stocks. This process of allocating capital according to when you’ll need it is called time segmentation or the bucket approach. This should allow you to relax and not have to be concerned about the daily, monthly, or even yearly market gyrations.

Should I be worried?

It is never comfortable to see your account balance drop. Now is not the time to panic. The S&P 500 did narrowly avoid sliding into official bear-market territory last week.  I believe the economic data  will stay consistent with a slowing but still growing economy. Eventually, sentiment will shift as investors see that inflation and rising rates are not destroying corporate profits or the labor demand.  Money will come back into growth stocks like Apple, Microsoft and Google, as investors shift their focus to opportunities instead of risks.

As to the economy and markets more generally, here’s why I think you should NOT be worried.

  1.  We have positive momentum in the labor market, and credit is flowing to the real economy despite the sharp tightening in financial conditions.
  2. On the corporate front, profit margins have likely peaked, but S&P 500 earnings are still expected to grow 9% on top of last year’s rise. Estimates could be revised lower as the economy slows though I expect earnings growth to stay positive this year and next.
  3. The US Consumer is healthy and spending. Consumer spending accounts for more than two thirds of economic activity and that grew by 2.7% in the first quarter of this year.

It is important to stick to your plan in times of market turbulence or uncertainty.  I will close with a quote from  one  of America’s most famous law enforcement officers, J. Edgar Hoover.

The will to do, the tenacity to overcome all obstacles and to finish the course, the strength to cling to inexorable ideals, are all rooted in courage.

My calendar link is below.   If you haven’t scheduled a review or if you are feeling nervous and just want to have a quick call to discuss your investments please use the link and schedule a time.