I have quite a bit to say about the rough week we just saw in the market. Before I do, take a look at our video explaining how a 401(k) rollover works…
In The Market...
The S&P 500 fell -4.1% last week. Let's look under the hood:
The above table tells the story. Last week was the worst for stocks in seven months. Just when it looked like a new rally was underway — with the S&P index having risen nicely above its previous record high — investors had the rug pulled out from under them. The S&P is down roughly -6% from that peak, which begs the obvious question:
Let’s start by revisiting the chart of the S&P 500 that I shared last week. My inclination seven days ago was that stocks were positioned to bounce coming off the prior week’s decline (see my notes in blue). This does not happen, as evidenced here:
The losses were quick and significant (see pink arrow). To the point that the S&P 500 fell to its 200-day moving average, which is that reddish shaded area. The 200-day moving average is a critical level for a lot of investors, including us. It is arguably the best reflection of the long-term price trend of any investment. In this case the S&P 500 index, which we believe most accurately represents the entire U.S. stock market.
It is no coincidence that the S&P finished the week right on top of its 200-day average because of how influential it is to so many investors. It often serves as a battleground statistical price-point between buyers and sellers, resulting in a supply/demand tug-of-war.
When the market is healthy, stock prices often bounce higher after falling to the 200-day moving average. When the market is unhealthy, stock prices can struggle to hold above the 200-day average, often falling considerably below it.
So right now, we want to see stock prices hold that 200-day moving average line. Additional losses could steepen fast if there isn’t a quick rally higher. Here are some of my thoughts, which hopefully provides insight into our process with the market entering this week at such a crucial level…
Near-term market outlook:
Best-case scenario right now is that we see stock prices rally back a few percentage points before getting hit with another wave of selling. This is how I thought the market would respond back in February after the S&P fell more than -10%. In that instance the market did exactly that — it rallied back, fell again, and ultimately took 3 months to regain its footing.
Worst-case scenario is that the losses are only beginning and that any rally attempts are quickly halted by more investors looking to sell.
We selectively sold a couple investment positions last week, in effort to play a little defense. If stocks fall further in the next few weeks, playing defense will hopefully curb those losses. If stocks rally from here then we still have our other current holdings that should benefit from market appreciation.
If stocks prove that this past week was just a blip and quickly rally back to new highs, we will reinvest the cash from our recent sales and go back to being fully invested. I doubt this will be the case, but if it is, we will have zero regrets about having played some defense.
Normally we would look to the bond market as a potential hedge against stock market weakness. The problem right now is that the bond market is weak. Both short-term and long-term interest rates have been rising, which means bond values are falling. The lone bright spot (relatively speaking) has been high-yield bonds, which we continue to own.
In theory it is great to see higher interest rates, but not at the expense of a falling stock market. Rising rates and falling stock prices is a bad combination that we do not want to see because it means investors are pulling their money from both the stock and bond markets.
So, for now, rather than pivot and buy bonds, it is more likely we will sit tight in cash until either the stock and/or bond markets improve.
We are unlikely to make wholesale portfolio changes. Part of the reason we mostly keep our investment sizes from 10% to 25% of the total portfolio is to give some flexibility when the market looks iffy as it does right now.
Most investors think of gains in terms of percentages earned and losses in terms of dollars lost. The larger your account the worse any short-term losses will feel, but stay calm. Focus on the longer-term view beyond the stretch of a few days.
I am sure that the media buzz will build in the coming days. What is written or said in the media has no bearing on how we manage money. You should not let it sway you, either.
Sometime soon there will be a nice buying opportunity. It could take a bit of time, but eventually it will come.
We are continuously assessing the long-term and short-term health of the market. We will stick to our process and make buying/selling decisions using our best judgment based on the data we employ.
If you have any questions, feel free to ask. Hopefully the above addresses some of the things you might be curious to know at this time.
In Our Portfolios...
Have a great week!
Brian E Betz, CFP®