Month: May 2022

Slip-and-falls on steep terrain are far and away the number one killer of high mountain climbers, and interestingly, the vast majority of these falls occur on the descent, the part most would describe as the easy half. It’s easy for a climber to die on the way down, for the whole process lends itself to this outcome, and it’s just as easy for investors to financially perish in a bear (down) market, equally supportive of the tragedy. The S&P 500, the most representative index of the U.S. stock market, stands on the precipice of a bear market today. What is a bear market, and what are its identifying characteristics? What mistakes does it exploit, and how can you avoid making one?

A bear market is most generally defined as a 20% decline from the recent high mark. Year to date, the NASDAQ is down 30%, the S&P500 is down 19%, and the Dow Jones is down 15%; the strong indication is we are in the beginning of a major bear market.

As described in Bob Farrell’s 10 Rules of Investing, the three stages of the bear market are as follows:

• Sharp down

• Reflexive Rebound

• Drawn-out fundamental downtrend

The ‘sharp down’ stage has clearly already occurred, and given the S&P 500’s 11% recovery, and the Nasdaq’s 16% recovery, from March 14 to March 29,² maybe the ‘reflexive rebound’ stage has as well. This means several things about the stock market today: investors are still too optimistic about stocks in the short-term, the worst is likely yet to come, and a ‘drawn-out fundamental downtrend’ likely lies ahead.

Whether this is ‘officially’ a bear market remains to be seen, but if it is, the following mistakes will likely prove deadly for investors:

• Buying aggressively into the peak (late last year, at price levels that may not be seen again for a decade or more).

• Allocating the overall portfolio too aggressively at a major market peak (again, late last year; returns are most attributable to portfolio allocation, not security selection. Fidelity went public in the last year saying its customers were far too risky for their own well-being).

• Overconcentration (too much exposure to a small number of holdings; too little real diversification; too much correlation among holdings).

• Capitulating at the bottom of the bear market (selling indiscriminately at the market bottom to stop the pain).

Easy to comprehend, hard to practice methods of avoiding the aforementioned mistakes include:

• Buy great businesses whenever they trade at a reasonable price.

• Know yourself as an investor, be well acquainted with your tolerance for volatility, and appropriate your investment capital in a manner consistent with these two things.

• Diversify holdings to mitigate a large loss scenario.

• Understand the investing environment, and the types of investments and industries that thrive in that environment. Investors generally associate deflation with a bear market, yet those who do so this time will be sifted by rapidly rising prices.

• Stick to your bear market plan, and regarding high quality holdings, slay your emotions to avoid selling them at depressed prices.

• Build cash, wait for broad capitulation, and pray for wisdom and courage to buy great stocks when others are fearful.    

 Think about it, Shaun.   

“It’s better to buy a great company at a fair price than a fair company at a great price” ~Warren Buffet

1,2 Yahoo Finance, May 20, 2022 https://finance.yahoo.com/

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

 All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss.

 Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

Significant preparations are made for bad weather scenarios when planning a big mountain expedition, but when the battering begins, it’s instantly clear to the mountaineer the time for planning is over; carrying out well-laid plans is suddenly essential for survival. Stagflation is as dangerous to the financial lives of savers and investors as are high mountain storms to the physical lives of mountaineers. The fact it kills more slowly allows for posture adjustments even after its arrival, unlike most mountain storms, and this is an important distinction, since stagflation is already here.

Stagflation is a portmanteau combining the words stagnation and inflation. It depicts an economy with little or no growth, high unemployment, and high inflation.¹ Last week’s newsprint of a 1.4% contraction in GDP confirms the U.S. economy is weak,² and the suddenly plummeting yield on the 10 Year Treasury bond seems to be confirming it. ‘Official’ Unemployment was recorded at just 3.6% in April,³ painting a rosy, but wildly inaccurate picture of America’s employment market. The far more revealing Labor Participation Rate, presently at a 45 year low (outside the Covid19 lockdown), proves real unemployment is an exponentially higher number. This week April inflation came in at 8.3%, the second consecutive “highest in 40 years” reading.⁴ No mountaineer would ever doubt the arrival of a deadly storm; though stagflation is more difficult to perceive, the above facts confirm it is here.   

Given ‘the Fed’ now has to simultaneously fight a weak economy and high inflation, the following threats to savers and investors are escalated:

• High probability of a near-term Bear Market in stocks

• High volatility in the financial markets

• High probability of a near-term recession

• Higher probability of additional critical policy errors by ‘the Fed’

• The systematic vaporization of cash savings by inflation

• Economic and social disruptions due to ongoing supply problems

Final preparations might include:

• If retired, have the equivalent of 5+ years of withdrawals in cash

• If working, think twice before relinquishing earned income

• Properly diversify your investments to mitigate the risk of a catastrophic loss.

• Have a long-term mindset towards quality holdings, and ruthlessly beat your emotions into subservience with a stick, then slay them.

• Tighten your budget, eradicate impulse spending, and payoff your consumer debt.

• Watch less TV; instead, gain and use valuable skills to replace high expense budget items.

• Exercise in the sun, create a restful bedroom atmosphere, and graze on healthy foods to minimize future health-related expenses.

• Be thankful for what you have, and share some of the excess with those who can’t pay you back, then quickly forget all about it.

Think about it, Shaun.   

“The prudent sees danger and hides himself, but the simple go on and suffer for it.” ~Proverbs 27:12

 “God loves a cheerful giver.” ~2Corinthians 9:7

 “A good man leaves an inheritance to his children’s children.” ~Proverbs 13:22

1 The Balance, “What is Stagflation?”, by Kimberly Amadeo, October 29, 2021

https://www.thebalance.com/what-is-stagflation-3305964

2 USA Today, “Economy contracts first time since 2020 in first quarter as GDP falls 1.4%”, April 28, 2022

https://www.usatoday.com/story/money/2022/04/28/us-economy-growth-first-quarter/9562730002/

3 Trading Economics, US Unemployment Rate

https://tradingeconomics.com/united-states/unemployment-rate

4 Yahoo Finance, “Inflation decelerates slightly from 40-year high as CPI rises 8.3% in April”, May 11, 2022

https://finance.yahoo.com/news/inflation-consumer-price-index-cpi-usa-april-2022-123135066.html

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

 All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss.

 Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.