This week’s commentary is a guest piece by the gurus at Lincoln Financial, one of the ‘big-league firms we regularly work with. Although DSWP is not necessarily in lockstep with all their points, in general we think it’s worth sharing.

From LFS:

After three straight calendar years of strong gains, investment markets have experienced heightened volatility in 2022. Investors have had to deal with a litany of concerns. Pent-up demand and easy money policies have, together with other factors, caused inflation to surge.

The Fed, aware they may have kept their foot on the pedal a bit too long, raised interest rates. They have also signaled they were prepared to raise short-term interest rates aggressively, if necessary. To all of this, add the uncertainty of the war in Ukraine and the possibility of a recession, markets were rattled. Equities, as well as fixed-income markets, resumed the slide in the first half of June.

Perspective on bear markets

In the past few days, the S&P 500¹ closed with a 20% decline in 2022. A bear market, while it sounds scary and dramatic, means that equity markets have experienced a decline of 20% or more from recent highs. While unsettling to say the least, they are, unfortunately, rather common. In the last five years, there have been three bear or near-bear markets. In 2018, markets flirted with a 20% decline but recovered just a fraction away from a bear market designation. The 34% pandemic decline in March 2020 was so brief, many have forgotten it. We remember. In our work, remembering declines encourages discipline.

Over the next few days, we will likely see many media reports about the recent decline. While some might take these as a signal that an important line has been crossed and things are destined to get worse from here, this is not necessarily true.

The bear market designation is purely arbitrary, and it is not a prediction of further declines. Financial markets are discounting devices. That means that market participants take all the available information and discount them to arrive at a value. It means that the market has already attempted to “bake in” the available information.

That information, of course, can change quickly in both directions. Since 1980, the S&P 500 has experienced, on average, a 14% intra-year decline. Despite this, 32 of the 42 years had a positive return.

What happens next: Fed tightening and recessions

The Fed has been raising interest rates to fight inflation. Many believe that this means the stock market will fall during these tightening periods. It is more complicated than that. From the 1980s through the present, there have been seven rate hiking cycles. During those seven cycles, the S&P 500 produced a positive return during four of those periods and a negative return in three.

There have been many news items lately about a recession. The reasoning goes like this- as the Fed raises short-term interest rates to cool the economy, there is the possibility that they could overdo it. This could potentially push the economy into recession, further pressuring stock prices.

While this is possible, it is far less certain than the newscasts and articles might imply. Market returns during recessionary years were often mixed. Since 1945, the U.S. experienced 13 recessions. Of the 13, six of those years were positive and seven negative. In the year following recessions, 10 of the 13 were positive, with an average return of 16.9%.

Optimism or pessimism? Better yet, realism

We are certainly not dismissive of the year-to-date declines. We know it is difficult to see hard-fought gains erode. Just two years ago, we saw the crushing declines of the pandemic followed by a quick and powerful recovery. We have seen grinding losses of the Great Recession with a slower and more halting recovery.

Neither pessimism nor unrealistic optimism are solid investment strategies. Through the current decline and many others, we have experienced, we know we have a job to do. It is to be stewards of wealth. It is to provide prudent guidance through the possible opportunities and inevitable difficulties that investment markets present.  

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Sources: S&P Global, Federal Reserve, Barclays Aggregate, Wall Street Journal, JP Morgan Asset Management, and CNBC

¹The S&P 500 consists of 500 stocks chosen for market size, liquidity, and industry group representation.  It is a market value weighted index with each stock’s weight in the index proportionate to its market value. 

Past performance is not indicative of future results.            

Ron’s Market Minute — What is, is!  Did the FED Meeting Change It?

There are a couple of basic rules when using technical analysis.  The first of these is that the trend is the trend.  It is the most important piece of data that we can access, and before any kind of analysis, we must know what the current trend is.  It isn’t necessarily what we’d like it to be, it just is.  As my friend and mentor Tom Dorsey would say ‘What is, is’.  I will say from a lot of experience that a trend is often not what I would like it to be.  Another tenet is that a directional chart only indicates what the trend is, it does not indicate how long it will last, or how far it will go in a direction.  Let’s have another look at a GONOGO chart of the SPY, which is the ETF representation of the S&P500 Index*.  Remember that 80% of the investable stock dollars are represented by the SPY.   

 This time period is about four months, the vertical bars represent daily prices, Blue is strong UP market, Light Blue is weaker, but also UP market, Brown is market with no direction, Pink is Down Market, and Purple is Strong Down market.  You’ll note that the bars are primarily Pink and Purple, and the downward direction of trend is, I think, quite clear.  Now pay particular attention to the purple bar second from the right-hand edge.  This was the FED announcement day. It shows that the price did bounce a bit from the prior day.  When all of us are hoping to see a bottoming of prices so that markets can reverse and move higher, it’s hard to NOT get excited on a strong up day which Wednesday was.  I saw several headlines expressing hope that with the FED admitting that it was behind the curve and would act ‘aggressively’ to fight inflation things might look a bit better.  I was anxious to see the charts. And here you have it. The blip that was Wednesday was just that.  It had no effect on the direction of the trend, as the continuing downward purple bars indicate for yesterday. Another item of importance is that charts can always change, as markets can always change. My belief is that the FED action is good to finally see. They are indeed behind the curve, and these are dangerous times. We continue to suggest that investors exercise much caution and continue a very conservative allocation.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite D406A
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com

LFS-4795626-061722

This weekly article reflects news, commentary, opinions, viewpoints, analyses, and other information developed by Denk Strategic Wealth Partners for use with advisory clients only and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email, please contact us at 602-252-8700 or by e-mail at lindaw@denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation. Information in this commentary is the sole opinion of Denk Strategic Wealth Partners. Past performance is no guarantee of future returns. All market related investments involve various types of risk, which include but are not restricted to, credit risk, interest rate risk, volatility, going concern risk, and market risk.

The Update provides information of a general nature regarding legislative or other developments. None of the information contained herein is intended as legal advice or opinions relative to specific matters, facts, situations, or issues. Additional facts, information or future developments may affect the subjects addressed in this document. You should consult with an attorney, accountant or DSWP planner about your particular circumstances before acting on any of this information because it may not be applicable to your situation.

Lincoln Financial Securities and Denk Strategic Wealth Partners and their representatives do not offer tax advice. Please see your tax professional regarding your individual needs.

*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.

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LFS’ Regulation Best Interest Disclosure Document, which describes LFS’ broker-dealer services, and other client disclosure documents can be found here <https://www.lfg.com/public/lincolnfinancialsecurities/clientinformation/overview/disclosure>.

Past performance is not a guarantee of future returns.