Fighting Temptation in a Volatile Market

Written by Rob Copeland | 27 October 2022

The 13-year period through early 2022 was a very lucrative one for investors, with stocks, as measured by the S&P 500 index, returning more than 400% over that time. But since the market's high on Jan. 3, investing has been anything but a fun ride.

Stocks are down about 20% this year, despite rallying over the past few days. And bonds, usually a safe haven when stocks are struggling, are down 17% year to date. And there's still a lot of uncertainty ahead as the Fed continues raising interest rates to fight four-decade-high inflation. So what should investors do?

The first step is to zoom out and look for perspective. Volatility and even bear markets are the price of getting access to the markets' long-term returns. That 13-year run-up in the S&P included many significant setbacks, including dips of 28% and 34%. As an investor, you can't enjoy long-term gains without enduring temporary setbacks.

Is the current bear market near an end? It's impossible to say. But one thing to remember is that market timing, however tempting it may be, doesn't work. Study after study has proven that attempting to beat the market by leaving it and then jumping back in at the right time is a fool's game.

Remember, to get out near the top but also get back in near the bottom, you need to guess right twice. Sure, you might get lucky a time or two, but more often you'll lock in a loss by selling and get back in well after a recovery has started. If there were reliable ways to identify market tops and bottoms, professional investment managers would never have down years. Yet nearly 80% of actively managed mutual funds trail their benchmark indexes.

So what should investors be doing right now? History teaches us that during volatile periods, the best thing to do is almost always to ignore the markets and our portfolios and trust that positive returns lie ahead. Consider the fact that between 1930 and 2021, the S&P 500 ended 30 years in negative territory, but 62 in positive territory. While 2022 may end up being a down year, the market is cyclical, and setbacks have always set the stage for more gains.

If you're tempted to sell or buy investments because of scary headlines or tips you've picked up from the media or family and friends, ask yourself whether you truly know something that countless other investors don't. Then ask whether you're certain enough to bet your money on it.

Fear and greed are always powerful forces when it comes to investing, and they are exacerbated in times of stress. If you're investing money that you won't need for several years, your best move is likely sitting tight and remembering that short-term declines in your portfolio are the price you pay for long-term gains. Please don't hesitate to contact us if you'd like to discuss your investments.

Understanding the Fed’s Rate Hikes and the Market

Written by Rob Copeland | 21 September 2022

A little more than a month ago, markets were in an upbeat mood. Recent data had shown that inflation was finally beginning to slow, and investors hoped that pressure on the Federal Reserve would ease its interest-rate increases as a result. Two positive inflation readings in a row would make that scenario a lot more likely.

That's not what happened, unfortunately: The Sept. 13 inflation report showed consumer prices up 8.3% from a year earlier, worse than the forecast of 8.1%. Inflation didn't jump by 9.1% or 8.5% as it had in the prior two months, but the result it was disappointing given that gasoline prices had fallen sharply. The persistence of price increases is forcing the Fed to maintain its aggressive inflation-fighting stance. On Sept. 21, it raised the key Fed Funds rate by .75%, while signaling that it will continue to act aggressively to combat inflation. In the fastest rate-increasing cycle since the 1980s, the Fed has now moved the short-term rate it controls from near 0% to between 3% and 3.25% in just seven months.

These developments are a reminder that one good reading, whether it's on inflation or economic growth or any other financial data, does not make a trend. I continue to believe that the worst of inflation will soon be behind us, if it isn't already. The producer price index, which measures how much businesses pay for the things they need, fell .1% in August. Drops in so-called wholesale inflation generally point to an eventual decrease in consumer inflation.

How long will it take for consumer inflation to decline in a meaningful way? It's impossible to say for sure. For now, investors should stay patient, but also be on the lookout for buying opportunities. The market can behave irrationally, especially in times of extreme emotion, and smart investors can take advantage of that fact. As volatility occurs, good businesses wind up being sold off alongside bad ones. Market pullbacks can create the opportunity to own great stocks that were recently prohibitively expensive.

It's also important here to maintain a long-term perspective. Even with the 2008-2009 crash and the 2020 Covid crash, as well as innumerable smaller declines, the value of the S&P 500 has increased by 368% over the past 20 years. In the long run, patience pays off.

Better Inflation News Spells Opportunity

Written by Rob Copeland | 19 August 2022

Last month, I wrote that good news on inflation could be the catalyst that gets the market moving. Well, that good news materialized on August 10: Inflation rose 8.5% in July, down from 9.1% the previous month.

Make no mistake, 8.5% inflation is very bad for consumers. Our grocery bills are 8.5% higher than they were a year ago. But for investors, what counts is the direction of inflation. While the rate of price increases is still high, it looks like it might have peaked in June. The stock market rallied more than 4% over the subsequent week before giving back some of its gains.

The takeaway here is that the market moves based on what it thinks will happen going forward. And the signals are that it believes inflation will continue to moderate, relieving pressure on consumers and corporate earnings. I anticipate that the monthly inflation numbers will continue to drop. Remember, the CPI data are lagging indicators: They reflect what's already happened but not what's happening right now. And what's happening currently is that commodity prices are continuing to fall and, based on my own observations at the grocery store, prices of consumer staples are falling too.

So with an ugly first half of the year in the books, we should see stocks start to perform better. It's highly unlikely that this will be a smooth ride, though, so investors should buckle in. One major headwind for stocks is that the Federal Reserve plans more aggressive interest-rate increases as it continues to fight inflation. All eyes will be on next month's meeting of the Fed's policy-setting committee. Will the Fed raise interest rates .75%, as it's done twice so far this year? Or will it choose a less aggressive approach? Bringing inflation under control without stalling out the economy won't be easy.

In the meantime, we have an opportunity to invest. It may be wisest to nibble in the near term, and if and when the good news continues, to get more and more fully invested.

Don't hesitate to reach out to us if you'd like to discuss your investments.

Is the Next Stock Market Catalyst Taking Shape?

Written by Rob Copeland | 21 July 2022

In last month’s blog, I explained that good news on inflation could serve as the catalyst to break stocks out of their long slump. Well, the latest inflation data, issued on July 13, are the opposite of good news: Consumer prices rose more than 9% on an annualized basis in June, the worst reading in 41 years. 

But something interesting is happening. While the official data are still very downbeat, everyday consumers are actually seeing prices for many goods fall. As of Friday, gas prices had dropped for 30 days in a row, making a gallon of gas 44 cents cheaper than it was a month earlier. Gas prices make up less than 6% of the Consumer Price Index, but they are exceptionally volatile, and as they filter through the economy, they ultimately affect the price of all kinds of goods and services. 

In fact, prices have been falling across a range of commodities in recent weeks, from copper to soybeans and coffee. These lower costs will ultimately be reflected in the price of goods and services. And though it’s far from scientific, I noticed a sharp difference between my past two grocery bills. What’s causing the decline in commodity prices? Most likely it reflects a fall in demand caused by the market’s increasing fear of a recession. That’s not great for the economy, but it could be good for stocks. Investors have been in a defensive mood for months because of rising inflation, which typically hurts most companies’ financial results. Clear signs that inflation has topped out or started easing, I believe, will spark a market rally.

The assumption behind that rally would be that falling inflation will make consumers less reluctant to spend more freely, which would bolster companies’ revenues. In addition, signs that inflation is coming under control could cause the Federal Reserve to ease up on its planned interest rate increases. 

But why is government inflation data telling a story of rising inflation, while commodity prices are showing signs of falling? Simply put, CPI is based on backward-looking data that’s typically four to six weeks old. The commodity data is much more recent. We’ll see if the July CPI, which will be released in August, will contain good news. If it does, look for stocks to react.  

What does all this mean for you as an investor? If you have cash on the sidelines, it’s probably time to start planning how to invest it. Stocks are likely to be volatile for some time, but investing in the right areas soon could yield good long-term results. Bear in mind that many quality stocks have been swept up in the broad selloff of the past several months and thus are available at very attractive prices. Don’t hesitate to contact us if you’d like to discuss your investments.