Bear Market Rally or New Bull Market?
It can be hard to feel comfortable about current market conditions, but at least the market seems to be signaling that things aren’t getting any worse. Now is a good time to plan for the remaining four months of the year.
Investment returns, as of June 30th, 2022, marked the worst start for both the stock and bond markets in 50 years. Inflation, rising interest rates, negative GDP growth, de-globalization, political unrest, and the war in Ukraine hit investors simultaneously. There was nowhere to hide. Even defensive sectors like gold, TIPs, and REITs were negative in the first half of the year. Cash was the only asset class to remain steady. However, sitting in cash for the long term means you are losing money due to inflation.
Since July 1, the markets have rebounded and cut the June 30 losses in half. Instead of being down 20% on the S&P 500, investors are only down 10% year-to-date. The NASDAQ index is up 20% from the low in June. This turnaround has been caused by lower gas prices at the pump, July’s higher employment number, and an improvement on the inflation front. The Consumer Price Index dropped from 9.1% to 8.5% this month. Producer prices showed some improvement, too. Maybe inflation has peaked? If it has, the Federal Reserve can stop being so aggressive about raising short-term interest rates after their September meeting. As of today, it is a coin toss whether they raise interest rates 50 or 75 basis points on September 21st.
So, what do you do as an investor? Change your asset allocation? Invest more cash? Do nothing? All this volatility is what makes it so challenging to be an investor. Every day we are bombarded with headlines that are usually quite negative and scary. It can be hard to feel comfortable about current market conditions, but at least the market seems to be signaling that things aren’t getting any worse. Now is a good time to plan for the remaining four months of the year.
In retirement accounts, if you have a long-term time horizon, this is an excellent opportunity to increase your equity exposure. Look at your 401k options and make sure you have enough invested in stocks to meet your retirement objectives. Over time, stocks have historically outperformed bonds. However, make sure you are set up for dividend reinvestment. Bear markets are wonderful opportunities to dollar cost average and hopefully buy more shares at lower prices. The same can be said for your ROTH IRAs or regular IRAs. With the markets down in 2022, you are buying stocks at a significant discount from the highs reached in January.
Cash feels good in the short run because you aren’t showing any losses. However, over a longer period, you are losing money on your cash due to inflation. For example, if inflation is 8.5% and cash earns zero, you lose 8.5%. A better way to go would be to buy the one-year treasury bill, which yields over 3%. You can sell the treasury if you need the cash in less than a year (with likely no principal risk) or let the bill mature in a year, and you get your money back. If interest rates are higher, you can reinvest at a higher rate or take this cash and buy more stocks.
If you are like Warren Buffet, you sit tight and don’t worry about the day-to-day volatility of the markets. This is easier said than done. However, you can make lemonade out of a few lemons in your taxable accounts. For example, if you bought a stock in early January this year, you most likely have a loss. Today, you could sell that lemon for a loss and either buy back this stock in 31 days or reinvest the cash into another stock that has better prospects going forward. Tax losses can be used in perpetuity, so if you took some gains earlier in the year, you could use losses to offset the gains or carry the loss forward into the future.
Nobody can successfully predict whether this rally is transitory or a new bull market; consequently, market timing is a fool’s errand. The stock market has, over a long period of time, usually returned 10% a year and typically goes up 70% of the time, but that doesn’t mean it will continue to do so. Volatility is the price we pay for generational wealth. There is no free lunch. Before the end of the year, look at the asset allocation in your retirement accounts, invest cash into short-term treasuries, and take tax losses in taxable accounts. These are things you can do now while we are still in a bear market or at the start of a new bull market. At the end of the day, at least you are doing something.
Fred Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.
Fred Taylor is a managing director and partner of Beacon Pointe Advisors’ Denver office. He helps individuals and families build wealth, live off their wealth and leave a legacy for future generations. A former economic advisor to Governor Bill Ritter, Fred has more than 35 years of financial services experience.