It’s Just a Bear. Nobody Panic.

Greetings –  

The latest decision from the Federal Reserve and the commentary that followed have upset the financial markets this week, not just in the U.S., but around the world. The asset bubble, which includes stocks, bonds, housing, and all asset classes, was created by the Fed and is now being destroyed by the Fed. 

If I had any nice words to say about our financial leaders, I would insert them here. Instead, I will quote another financial professional:

Creating massive bubbles in one calendar year only to have to pop them in the following calendar year is irresponsible. There should be something in between 90 mph and slamming on the e-brake. Is this not taught in Ph.D school?

—Josh Brown, The Reformed Broker

This is not our first bear market, and it won’t be our last. I offer the notes, thoughts, and charts below to provide some perspective on the current situation.

From Bloomberg:

“Markets are adjusting to the new, more hawkish reality after the Federal Reserve raised rates 75 basis points this week and lifted projections for where the base rate will be this year and next year. Goldman Sachs has cut its year-end target for the S&P 500 to 3,600 from 4,300, citing higher interest rates. The forecast is skewed to the downside because of rising odds of a recession. The Fed’s hardening fight against inflation has affected all assets, with investors asking, why buy now when things could get cheaper still? Such an intense pace of tightening may be hard to escape. Nations are being forced to go it alone in erecting defenses against the dollar’s relentless strength.” 

Now, Let’s Break Down This Chart:

We are still above the market lows set in June. But, we’ll have to wait and see if that level holds. 

Here’s a quick review of the 2022 bear market to date: 

• Down 12%
• Up 11%
• Down 20%
• Up 17%
• Down 9%
• Up 5%
• Down 6%

Where to next is anyone’s guess, but the overall trend is down. 

Going back to 1990, the only years that looked similar with “down days” of 1% or more were 2002 and 2008. Both years had significant bear markets that were followed by significant bull markets.

Consider This Straightforward Perspective:

I appreciate this sensible commentary from Ben Carlson, CFA, author and writer of the blog A Wealth of Common Sense:

Every financial plan has to survive difficult times in the market.

It’s also important to remember to focus on the right stuff during markets like these. And for me, that means zooming out and focusing on the long run.

In his book The Four Pillars of Investing, William Bernstein offers up one of my all-time favorite stock market analogies courtesy of Ralph Wanger, a portfolio manager from the Acorn Fund:

He likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner. 

The longer this volatility lasts the easier it becomes to pay too much attention to the dog and not the owner.

If you’re an accumulator of financial assets, this volatility should be viewed as an opportunity to buy at lower prices, not a risk.

If you’ve already accumulated financial assets, this volatility is the other side of a decade-plus of extraordinary gains in the U.S. stock market.

Either way, it’s important to remember that volatility—to both the upside and the downside—is a feature of bear markets.

There is nothing you can do to control that volatility.

But you do control how you react to the volatility.”

If you’re interested, you can read Ben’s full article here: We’re Still in a Bear Market You Know

So, Now What? What’s the Strategy?

1. I’m suggesting we plan for anticipated cash flow needs over the next 18 months. Risk assets will do what they do. Let’s reduce or eliminate market risk for assets that are designated to fund near-term needs.
2. Tax efficiency is key. Harvesting losses to offset gains in 2022 and future tax years will be on the front burner as we enter the fourth quarter of the year.
3. We have been very bearish on bonds for many years. But, while fixed income is still not our favorite asset class, we can no longer be as pessimistic given how far rates have risen in the past 12 months. 
4. I’m also recommending that we take advantage of the volatility to make new long-term investments.

Fall is upon us. It’s my favorite season. Enjoy the colors and the emerging crispness of the Midwest air. 

–  Brett