As we wrote last month, the stock and bond markets have gotten off to one of the worst starts to the year in history. Jerome Powell and the Federal Reserve have indicated they are going to do everything they can to bring down inflation and asset prices have taken them at their word. The S+P 500 entered a bear market earlier this month (down over 20% from all-time highs in January) for the first time since the COVID outbreak in 2020.
You can see why inflation is so hard for businesses to navigate as earnings have been released so far this year. Just look at what happened to the price of Target shares when they announced that shoppers are changing their behaviors in the face of higher prices. Decreasing demand for non-essentials like TVs, kitchen appliances, and bicycles combined with increased prices for shipping and wages for workers caused the stock to drop almost 25% in one day.
As of the middle of this month, we were tracking to have one of the top 10 worst years in history. Not great.
All of the volatility this year has left investors without any good options. Stocks, bonds, and even traditional inflation hedges like gold haven’t really helped much.
Going to cash doesn’t help either – you will either lose money to inflation or potentially miss out when the market inevitably turns around. Here’s a chart showing what would happen if you sold at the bottom of each 10% drop in the S+P 500 and bought back 10 days later. You’d have missed out on more than half the gains over the last 20 years.
If you are itching to take some action this year, make sure it’s something that can positively impact your overall financial situation in the long run. Some of the areas we’ve been helping clients with this year include:
Rebalancing portfolios – There could be some opportunities to sell winners like energy and commodity stocks or use idle cash to buy beaten down stocks.
Buy a stock you’ve always wanted to own – No endorsement of any individual stocks here but some of the most popular names are in a bear market or worse.
Tax-loss harvesting – You can sell down positions and take up to a $3000 loss against your income for taxes and carry forward any additional losses to future years or offset against capital gains.
Roth conversions – For those that are converting traditional IRA holdings to Roth, your conversions go further by doing it while the market is down.
While we know there aren’t any reliable market timing signals to let us know when a bear market might turn around, there’s one indicator out there that has been almost right on the money – the CNBC “Markets in Turmoil” special. Take a look at the returns of the S+P 500 after they’ve run these in the past.
As if on cue, the market staged a comeback last week with the S+P 500 up 6.58%. Some analysts have speculated this is just a “bear market rally” and the selling will continue. Others are pointing to some encouraging signs that the tightening financial conditions are already starting to tame inflation and we may have a “soft landing” in the economy after all. It’s impossible to know now, but bear markets don’t last forever (in fact they average just under a year) and we’ll recover from this in time as well.