Dear Clients & Friends,
The question on everyone’s minds is, “Where is the bottom of this market mess?” We don’t know. Ok, that’s all. Have a great weekend…
Ok, we’ll dive a little deeper than that, but the reality is that no one knows. It’s terrific for marketing to pretend that we have a crystal ball, but let’s be real for a moment. All the talking heads we are currently hearing, who are predicting that certain levels may represent the floor, are just talking. If any of these Wall Street fortune tellers really had the ability to make such a prediction, they wouldn’t have to work on Wall Street. They would be retired and swimming in excessive wealth because they knew something that no one else in the world knew. People like hearing definitive conclusions because it builds confidence.
It is noteworthy that I did a Google search for “investment crystal ball” and among the first links to come up was one to purchase a Magic 8 Ball. Needless to say, I ordered one right away, and we’ve made a prediction in which we have an extremely high level of confidence. We predict that the market will be 60% higher than it is today within 5 years. That would represent a full recovery from where the market was at the start of the year, as well as enough returns to generate a moderate 6% return. It will be as if this current drop never happened - plus a 6% annualized return.
This is a brainless prediction, and it takes no effort to produce it. Why is it brainless? Because the timeframe is 5 years long, and history has repeatedly shown us that the markets always recover with time. That’s really the most important take-away. We must not break discipline; we must not sell out at a low point; we must give our portfolios time to heal. In the meantime, we’ll use non-stock market assets when we need to make withdrawals; every client has plenty of these assets for exactly this reason. For those of you who are in savings mode rather than distribution mode (working vs. retired), this is an excellent opportunity to use the monthly savings that we collect for you to buy in at low levels.
So, what’s our plan? For some clients, we’ve already begun dip buying in very specific areas. For all others, we plan to buy in when the S&P reaches 3822. As I write this, it’s at 3875, so we’re basically there. We think that the market will drop even further. Let me reiterate that - we think that the market will drop even further. However, since we don’t possess the ability to predict the bottom, it’s important that we get in too early rather than too late. If we’re too late, we’ve missed the opportunity altogether.
By the way, this is the sixth time that the S&P 500 has dropped roughly 20% from its high. It happened in 1998, 2002, 2008, 2018, 2020, and now in 2022. Very few of you haven’t been through this before. It doesn’t get any less scary, but this is not uncharted territory.
I’d like to share some commentary written by our good friend Brad McMillan, who we quote on a regular basis. He wrote about the recent collapse of confidence within the markets:
A Collapse of Confidence?
Looking at the internals of the market, that something seems to be a sudden fear of a consumer-led recession. Both consumer sectors of the market, staples and discretionary, were among the hardest hit yesterday. Target had a historic loss in its stock value, and Walmart also got hit very hard. Based on their earnings, along with other trends such as declining consumer confidence and real incomes, the consumer suddenly looked much more vulnerable. As goes the consumer, so goes the economy and ultimately the market. Investors were already worried about growth, and suddenly those worries had an immediate focus—and confidence pulled back, along with the market.
This collapse in confidence, then, is what's driving the most recent decline. This is actually good news. Why? First, the prior pause suggests that valuations are getting close to the levels justified by interest rates, which should provide something of an anchor. Second, market drops due to a sudden loss of confidence often reverse when the fundamentals remain sound and confidence comes back.
I would like to touch on some of the underlying fundamentals of the economy. Surprisingly, job growth and consumer spending remain strong. We’re also getting encouraging data from the Vickers insider trading report. This report tracks the buying and selling of stock that is owned by corporate insiders. We take this data very seriously, because it’s the insiders who have the best read on their own companies. Their behavior, as it pertains to their own company’s stock, is very compelling. It was also one of the very few metrics that we saw reverse immediately prior to the COVID recovery in 2020. Last week, the Vickers insider buying index reached a level of bullishness (if that’s a word) that I’ve only seen two other times in my career.
That’s not to say that I’m not worried. Consumer spending is healthy, but inflation is likely to eat into that. The housing market has been on fire, which promoted high demand for home goods and construction, but recent metrics lead me to believe that significant softening in the market is right around the corner. Mortgage rates are up 50%+, home construction costs have risen dramatically, and mortgage demand has fallen. So, yeah, there are things to worry about, and there are signs of weakening. However, the current economy is not as weak as the current stock market. As Brad put it, “confidence has grounds to return.”
This has been a particularly annoying pullback because, due to interest rates, bonds have not padded the stock market decline. Putin is out of control, a resolution for which we cannot predict. Let’s also acknowledge the sheer volume of new investors who got into the market while they were sitting at home during the start of the pandemic. Many of them are now reconsidering their tolerance for volatility, and that’s likely resulted in a mass exodus of smaller investors. It’s been a broad, rapid, and painful pull back, and “there’s nowhere to hide” (another McMillan-ism).
There are areas of the market that have clearly benefitted from the COVID era (some tech, some stay-at-home industries, online shopping, etc.), but many of these areas are currently trading at pre-pandemic levels. This indicates an oversold state for at least part of the market. This is to be expected, since the market “pendulum” always swings too far in both directions. However, it is reason for hope that we are closer to the bottom than to the top.
Folks, buckle in. While I’m eager to buy into this dip, doing so makes our portfolios even more volatile. Seat belt, barf bag, blindfold - use whatever it takes to push through and maintain the discipline necessary to feel comfortable as we make the best moves we can in your portfolio. Let’s hope that two years from now and in the midst of the 493rd COVID variant, the market will be considerably higher than it is today, which would make buying into the dip worthwhile.
Have a great weekend and call in with any questions you may have. Despite this decline, we still enjoy talking shop. 😊
-Your diligent crew who have not slept in 5 months
Matthew Ramer, AIF®
Principal, Financial Advisor
MOR Wealth Management, LLC
1801 Market Street, Suite 2435
Philadelphia, PA 19103
P: 267.930-8301 | c: 215-694-4784 | f: 267.284.4847 |
601 21st Street, Suite 300
Vero Beach, FL 32960
P: 772-453-2810
matthew.ramer@morwm.com | www.morwm.com
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