Monthly Outlook: June 2022
What a long, strange trip it’s been this year, already. The peak for the S&P500 was on the first trading day of the year, January 3rd, and it’s down 12.8%, YTD. As unsettling as that is, it doesn’t tell you how we got here. The daily volatility has been remarkable – in both directions. We’ve seen 11 days where the market dropped over 2% (and several over 3%). But we’ve also seen 11 days where the market gained over 2%. If you’ve sensed the U.S. markets have been wild this year, you’re not imagining it. Other markets have been weak, also. International stocks are down 11.0%, and Bonds are down 8.8%. The only positive market is Commodities, with a YTD gain of 38.7% (thanks mostly to oil, which is up 52.9%). The semi-good news is that we’re beating market benchmarks easily, this year, and with a lot less volatility. But we’re doing that by losing less. Sometimes, when the market gives you nothing but downtrending markets, that’s the best you can do in the short run.
Follow the Trends – and They are Down
Although the market volatility gets the headlines, we’re more focused on how the trend has reversed for nearly every market this year. We define the long-term trend of every market as its 200-day moving average. It’s a simple calculation (for a computer) and one that is widely used by investors. We use a few extra factors in our algorithm, but defining and following the trend in this way gives us clear-cut trading rules. We buy markets that are trending higher, and we sell markets that are trending lower. Today, nearly every market is trending lower, using the 200-day moving average trend definition. Markets in a downtrend: US Growth, US Value, US Small, INTL Growth, INTL Value, Emerging, US Bonds, High Yield Bonds, and INTL Bonds. Markets in an uptrend: Commodities. You can understand, then, why we we’re in protection mode for now.
Should We Buy the Dip? (No!)
With markets down 20% to 30% by mid-May, some pundits and investors are tempted to “buy the dip.” After all, “stocks are on sale,” and “they always come back,” right? Similarly, many money managers and investors haven’t made any sell trades this year and are now stuck with losses, down-trending holdings, and difficult client conversations. They have no choice but to convince themselves and their clients that they should “buy and hold” or “invest for the long term.” How frustrating – for them.
We think there is a better way and, candidly, it’s simple (but does take discipline). Let’s say you allocate 30% to US Large Growth stocks (think Apple, Microsoft, etc.) using a low-cost index fund. Buy and hold 30% in this US Large Growth index fund as long as it’s up-trending (above its 200-day moving average). That could be two years or two months. Let the trend tell you – no guessing. Along the way, if it pulls back within its uptrend, you can add more and buy the dip. Conversely, if that US Growth index fund starts to trend down (moves below its 200-day moving average), then sell some (maybe half, maybe more, you decide). And along the way, if it does have a rally within its downtrend, sell the rally. This is the condition we’re in today. In other words, with nearly every market in a downtrend, we’d be selling the rallies and not buying the dips. This is what we’re doing for our clients every day, across a dozen markets, to manage portfolios.
Transition from Stimulus to Recession
Why have so many markets turned from multi-year uptrends to downtrends this year? It’s a simple answer, really. Investors have enjoyed years of stimulus provided by the Federal Reserve and Congress. It started after the Financial Crisis of 2008, and they really poured it on after COVID in 2020. As a result, we’re finally seeing massive inflation. The Fed’s primary job is to fight inflation, so they must undo their stimulus. They do this by raising interest rates and selling bonds. The challenge is to do all of this without triggering a recession. Unfortunately, history shows us that the Fed has a difficult time and a bad track record of tapering. Every series of rate hikes in the past 40 years has triggered a recession, which does lower inflation…but it also tends to create bear markets for stocks and housing. This is likely why markets have turned from up to downtrends. In downtrends, we’d advise investors to sell the rallies, don’t buy the dips.