By Maurice Stouse, Financial Advisor and Branch Manager
Investors have watched the market move its way down for most of this year. Whether invested in stocks, bonds, crypto or otherwise, it seemed that values just continued to slip. Why has this been so? We look at several inputs to help understand the outputs and talk about what investors might expect and do during these times.
The American economy has been on a growth spurt for quite some time. Believe it or not, the government ran a surplus – that is not a misprint – in April. The federal government took in $308 billion more than it spent. And that is a dramatic change from a deficit of $226 billion in April of 2021. We read that it is from strong income for businesses and ponder if the prediction that the U.S. is inflating its way out of record debt is starting to take shape.
Inflation in and of itself however has had quite an impact on the markets. Fears of rising prices for just about everything leaves investors worried that it is a matter of time before corporate profits feel the impact and hence have reduced their exposure to many equities. Technology stocks have been the hardest hit. The problem for many technology stocks is that if they are yet to turn a profit or pay little to no dividends, their stock price feels it when inflation and bond yields rise. The big, somewhat profitable tech stocks, however, have tumbled, along with everything else. By one account, just eight stocks, many of them technology stocks, make up a significant amount of the overall decline of the market.
We think investors should consider investing in many of the legacy, large cap technology stocks at this time as they are nearing multi-year lows and are in a relatively oversold state. The same sentiment is seen by many pundits with regard to biotechnology stocks.
Bear markets have historically hit their trough when we experience negative economic circumstances and perhaps high unemployment and low corporate profits. None of these are the case right now. Pessimism regarding the future is, however, pervasive.
Inflation has also caused the Federal Reserve to begin to increase its short-term rate and begin to reduce the size of its balance sheet. The balance sheet is an indicator of Fed activity in expanding or decreasing the money supply. The Fed has been increasing it since the start of the pandemic. That unleashing of money has driven asset prices for real estate, stocks, commodities, crypto, nonfungible tokens and a host of other assets. One reported statistic is housing values, which have risen $6 trillion in the last two years alone. The problem it has created is that the increase in the money supply has on the one hand spared the economy from a pandemic-driven depression but on the other also has set inflation in motion. The perfect storm of the supply chain imbalance and pent-up demand from Covid, along with scores of early retirements (causing a labor shortage and driving wage inflation) has led to inflation’s rapid rise. Left unchecked, inflation can erode purchasing power as well as standards of living.
The housing market accounts for about 20 percent of the U.S. economy and for at least one third of inflation. There is fear that housing may have peaked as pending sales continue downward and the refinance market has all but ceased. That could reverberate throughout the economy, affecting several sectors.
The Fed has an inflation target of two percent per year, which many consider healthy. Currently, inflation is more than four times that and that has sent asset prices down and raised the level of discomfort, if not outright concern, for many investors. We suggest investors look at some things to expect (based upon history) in bear markets and use that in their decision making. Question: Are market downturns and bear markets the exception or are they the rule? We think that for long-term investing, they are the rule.
Some characteristics of bear markets are important to take note of. The first of these are some of the dramatic upward swings that occur during bear markets. Investors have seen some dramatic legs up in a short period of time, often lasting just a day. Those investors who headed to the sidelines and are waiting to time a movement back into the markets most often miss these and that can have a dramatic impact on long term results. Bear markets also might signal that stocks or other assets had become overbought and an event or a series of events could bring markets back in line with historical averages. If markets are in decline one-third of the time, it could almost be argued that they bring efficiency to the markets by way of asset prices.
Bear markets, when they end – and they average nine months – typically represent very undervalued assets at the end as the pendulum has swung too far in the other direction. Bear markets exhibit excessive pessimism, while bull markets have exhibited excessive optimism. The problem is, they don’t ring a bell at the bottom just as they don’t ring a bell at the top of markets. We suggest investors, unless they need liquidity (cash) now, stay invested, not give up hope at the worst possible time, remain focused on their goals and govern their actions accordingly.
The First Wealth Management is located at First Florida Bank, a division of The First Bank, 2000 98 Palms Blvd, Destin, FL 32541. Branch offices in Niceville, Mary Esther, Miramar Beach, Freeport and Panama City. Phone 850.654.8122.
Raymond James advisors do not offer tax advice. Please see your tax professionals. Email: Maurice.stouse@raymondjames.com.Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, and are not insured by bank insurance, the FDIC, or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc.
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Views expressed are the current opinion of the author, not necessarily those of RJFS or Raymond James, and are subject to change without notice. Information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results.
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Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.
There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
Bitcoin and other cryptocurrency issuers are not registered with the SEC, and the Bitcoin marketplace is currently unregulated. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk.
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