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- Now What?
Now What?
Is the bear market over?
The S&P 500 has rallied about 13% since the June lows. The Nasdaq has climbed more than 16%.
Investors are looking around nervously asking… ‘What now?’
Is the bull market back on? Or are we headed lower?
That’s the million dollar question. But it’s the wrong one.
We’ll circle back to that in a minute. And first look at the Federal Reserve to see what they’re up to.
Regular readers know the Fed is hellbent on tackling inflation. They have egg on their face from getting it so wrong last year. And will do whatever it takes… even if they put millions of people out of work.
The market looks to have bottomed in mid-June. It seems to think the Fed is bluffing. That the Fed won’t raise interest rates that much longer because they’re pushing us into a deep recession. That they’re behind the curve.
We would probably agree. But the market is shrugging off pretty much everything the Fed is saying.
Here’s Minneapolis Fed President Neel Kashkari just a couple of weeks ago:
“We’re going to do everything we can to try to avoid a recession, but we are committed to bringing inflation down and we are going to do what we need to do.”
Kashkari then said,
“The Fed is far, far away from declaring victory on inflation… [so] ‘this doesn't change my rate hike path’.”
So the market — which sold off based on the Fed’s hawkish rhetoric over the past 6 months — is now discounting the Fed’s rhetoric for continued hawkishness?
The market was wrong this year. Especially about the rise of interest rate hikes.
It didn’t even think the Fed could raise rates to begin with…
Will the market make another mistake in 2023?
We’re no market prognosticators. Nor are we macroeconomists. So you won’t get a market call out of us.
But to think the Fed won’t continue on its warpath on raising rates to get inflation back down to 2% seems anything but a foregone conclusion.
This disconnect between the markets and the Fed’s rhetoric leads us to believe volatility is here to stay.
Regardless, we shared data that showed returns are still incredibly strong, after the markets fell 20%+.
Here’s what we wrote in our July 19th missive Through The Bear Market Looking Glass:
“[Samantha McLemore from Miller Value Partners] points out that after we’ve entered a bear market — down 20% from the previous high — the market averaged mid-teens returns over the next year. And low-teens returns per year over the next 3-5 years.
‘On average, the market gains 16% over the next year and 13% annually over the next 3-5 years (including any additional losses).’
The bad news? It’s not straight up from here. In fact, history shows more downside.
‘Once the market dropped 20%, there was an average additional downside in the mid-teens percentages.’”
So far, the one-year returns are right on the money. But ‘where do we go from here?’ isn’t the right question to ask.
The right question is two-fold:
Are you able to sleep well at night knowing volatility is likely here to stay?
Do you have conviction in your portfolio holdings knowing the market may have further downside?
These are questions you’ll have to ask yourself.
They’re tough questions. Ones that are easy in good times. Yet difficult in bad times.
We’ve just experienced one of the fastest market sell-offs in the first half of this year. So the feeling of fear and paralysis may still be fresh in your mind.
Things are feeling less bad now that we’re 13-16% off the lows. But the prudent time to go through those mental exercises is now.
Good investing,
Lance
P.S. If you’re looking for some help navigating these markets, we’d love to chat. Mighty is open and accepting new clients. Reply back and let’s set up a call.