The US stock market and bond markets have been in a down trend since the beginning of 2022. The big questions now are: Has the US stock market reached a turning point? Is the stock market at a bottom? We are watching for signs of this every day. In this article we will share some statistics that show it may be even worse than it looks, but this also presents opportunities.
In this blog, you’ll learn:
- Is This Market Worse than it Looks?
- How are the FAANG+M Stocks Holding Up?
- Comparing 2022 Market to the 2008 Decline
- The Battle of the Bulls and the Bears
- Bonds Continue Downward with Stocks
- What is our FJP Strategy?
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Is This Market Worse than it Looks?
You may be familiar with the 2022 YTD returns of the major US stock market indexes, but let’s take a closer look at the maximum drawdowns along the major indices:
Source: Charles Schwab, Bloomberg, as of 7/7/2022
The interesting part of this chart is the highlighted column on the right. Notice that the average stock in the Nasdaq and Russell 2000 is down nearly half from the high of the stock in the past year.
This means that half of the stocks are down more than 50% and some stocks are down 60-70% from their high in 2021. Some stocks are back to where they were before the start of the pandemic, while a few are back as far as 2017 levels.
How are the FAANG+M Stocks Holding Up?
A popular name for the large tech stocks is the FAANG; and with Microsoft often added to this list of large technology growth companies, makes it FAANG+M. This comes from the first letters of the company names Facebook (now Meta), Apple, Amazon, Netflix, Google (now Alphabet) and Microsoft.
These are the large tech companies that have driven much of the growth in the US stock market in the past decade, yet even these stocks have taken a substantial hit in the past year.
Source: ChakinAnalytics.com as of 5/20/2022 Intraday
Of these large tech names, Apple has held up the best, only down -19.6% from its 52-week high level. But Netflix, down -73.2% from its 52-week high level, has seen its price fall all the way back to where it was in July 2017. This shows the significant correction we have seen in even some of the largest market-leading companies.
Comparing 2022 Market to the 2008 Decline
With the US stock market down this far, the big question is: has the market reached a bottom for the year? This is a difficult question to answer, and we will not truly know until the year is over.
Let’s look at how the S&P 500 in 2022 compares to 2008:
In 2008, the US stock market continued down from the end position on the graph above shown above, to decline over 50% from the market high.
We hope there is nothing close to that this year, but we are continuing to be cautious. Our concern is that if the US economy moves into a recession in 2022, that may not be priced into this market and could produce more downside.
The Battle of the Bulls and the Bears
We are seeing swings in the US stock market index by as much as 4% up and down in a day, and we think the risk of a recession in the US economy in 2022 is rising.
7 factors that could have a negative impact on the US economy and stock market include:
- US GDP -1.4% in Q1 2022 due to less exports, because of stronger dollar making exports more expensive; otherwise, areas of the economy remain strong
- Inflation as measured by the Consumer Price Index was 8.5% in March and 8.3% in April
- Gas prices being the highest in 30 years
- Federal Reserve expected to do 0.50% rate hikes in their meetings in June and July, and ending with a Fed Funds rate possibly as high as 2.5% by year-end
- 30-year home mortgages jumping from 3% to over 5% in the past few months could cause downward pressure on home prices
- Slowdown in China due to recent COVID outbreaks
- War in Ukraine may continue for months
On the positive side, consumer spending in the US remains strong, especially with consumer discretionary spending for things such as travel.
Bonds Continue Downward with Stocks
The correction in the US stock market in 2022 has been especially challenging because the bond market has had one of its worst starts to the year in decades and bonds have not provided any protection against the declining stock market.
Source: HiddenLevers.com as of 5/20/22 Intraday
Since the Federal Reserve is expected to raise the interest rate on the Fed Funds rate significantly during the remainder of the year, we expect bonds to continue to struggle and move to the downside.
We sold bond mutual funds for our clients earlier in the year and currently do not own bond funds for our clients in our model portfolios. Once rates stabilize or reverse, we will watch over the next few months to see if it is time to buy.
What is our FJP Strategy?
We have taken many steps to protect client portfolios since the beginning of the year. The big picture includes selling investments that are down trending, to protect principal, watch for signs of a market bottom and buy quality investments when we start to see them in an uptrend.
Specific actions we have taken this year include:
- We sold ALL bond funds earlier in the year as they started down trending, since our expectation was that they would continue moving downward as the Federal Reserve has stated that they will be raising interest rates multiple times this year. Remember when interest rates go up, bond prices go down.
- Sold stock investments when they hit our stop loss levels to preserve principal
- Replaced higher volatility growth investments with lower volatility value companies, including high dividend companies
- Look for opportunities for stocks and funds that are in an uptrend
- Monitor the performance of the stock and bond markets daily
With this recent sell off in the stock market, stocks are looking much more attractively priced than they were just a few short months ago and great companies have gone on sale. We are looking for stocks and funds to buy when we think the market has started up trending again. Maybe we are at the bottom of the market - but what if we are not?
We are always going to give you our honest opinion, whether it is the good, the bad or the ugly.
We think the increased level of volatility we have seen in 2022 will likely continue in the coming months. We are monitoring the changes in the economy and stock market daily, and we will continue to actively manage investments and adjust as needed. We recognize this is a stressful time for all and are working daily to make this as smooth as possible for you.
If you have questions on how the topics in this article could impact your portfolio, give your Wealth Manager a call.
Financial Journey Partners - Partners in Your Financial Journey®
Our Financial Journey Partners office is based in San Jose, California. We have clients that live in many states across the country. If you have questions about your investments or financial situation, call us to schedule time to talk about your specific situation.
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