July Was The Best Month Since 2020, Now What?
In July, the S&P 500 was up 9%, the DOW up over 2,069 pts (6.82%) and NASDAQ up 12.4%. All markets are up 10 to 14% from their low points in mid-June but still down for the year. 1 Does this mean the Bear Market is over?
I would love to say “yes.” However, the best I can muster is a “maybe.” The stock market bottomed-out on March 9, 2009 with the S&P 500 at 676 and began to climb well in advance of the economy giving any signs of recovery from the “Great Recession” with unemployment at over 10%. WHY?
The same was true in 2020 during the COVID lock-down recession. With the lock-down our economy stopped and we went from “full-employment” (unemployment of about 4%) to an unemployment rate around 10%. Then the stock market dropped 32% in twenty-three trading days. Suddenly, the markets started up. This was way before a vaccine; with 10M out of work; and the fastest drop ever in our stock market….not only the U.S. economy but the world economy collapsed…. and the stock market started to go up. WHY? 1, 2
The best and only answer is the same one I gave my kids when they were little and asked a question I could not answer in simple terms: BECAUSE.
In this case, I can follow with: Because, investors in the stock market decided, that at that moment in March 2009 and again in March 2020, stocks were “cheap enough” and started to buy. Not because the economy was looking better or more people were getting jobs or better jobs. The buying began because investors know the markets always recover and go higher than the previous high point and at those dates in 2009 and 2020, investors decided this was the time and began to buy. Not because of anything they could see, read, or feel, but because they know markets always recover and now stocks were cheap enough to buy more.
Are stocks “cheap enough” now? As I said before, maybe.
I have said often before and will repeat to my last breath, I am an optimist. I also am an investor and a realist.
Several facts are very different now than in 2009 and 2020. Prior to both previous events, our economy was in a recession after growing by consistent yet modest rates before the recession began. During those recessions, the economy was shrinking and unemployment was high so the Federal Reserve was cutting interest rates while Congress was pumping money into the economy, all to stimulate growth.
Now in August 2022, the economy is booming and growing at near 9%, employment is less than 4% and the economy is still adding jobs. As noted before, the stock market just had the best month since 2020. Earnings (profits) of public companies continue to grow. All this means the economy is still quite “hot” and inflation will be hard to lower.
Even though the Federal Reserve has increased the Fed Funds Rate 1.75% so far this year and say they plan to increase the rate to perhaps 3% by the end of the year, the yield on the benchmark 10-year Treasury bond has dropped from a high of 3.49% on June 14 to 2.75% by the end of July. T-bill rates should be going up…not down. 3
A surging stock and bond market coupled with continued low unemployment and prices continuing to go up all means persistent inflation. The Fed’s mission is to have inflation in the 2 to 3% range. In order to accomplish this, the Fed may need to increase interest rates much more than 3%. The short-term impact on employment, company profits, not to mention the stock and bond markets, could be dramatic.
In other words, the short-term economic benefits of a surging economy and high employment often has the negative affect of high inflation. In this case, too much good news may be bad news.
I am not saying this to alarm or scare anyone, nor to make a prediction, but to help us all learn, understand and remember, how to act when short-term volatility happens. Yes, our July investment statements look pretty good. But don’t be dismayed or alarmed if the next few months are not the same.
High inflation is bad and needs to be corrected. The medicine is not pleasant to the taste, the side-affects can be unpleasant for a time, but leaving the illness untreated can be much worse. Dramatic increases in interest rates by the Fed will slow the economy, perhaps increase unemployment, lower company profits, cause a recession and hurt the stock and bond markets all with the goal of reducing inflation. All of this is not a disaster but a natural flow of the economy. Recessions can be expected occasionally and are short-term. All of this is temporary. Markets recover and go back higher than before.
What should you do? The same thing you have always done (I hope). Plan your cash flow needs well in advance. Avoid selling investments in declining markets. In fact, buy, buy, buy when markets are low. Don’t try to “time” the market. As Peter Lynch said, “The key to making money in the stock market is to not get scared out of the market.” Stick to your financial plan. If your goals and priorities have not changed, then your investments probably should not change.
Wollman Wealth Designs, Inc is a financial services firm in Escondido, CA partnering with families, friends and clients in San Diego County and around the country. Please visit our website, call the office or send us an email with your comments or questions.
The S&P 500 ended June 2022 at 4,087. It was at 676 on March 9, 2009.1 This is a 505% increase (not counting dividends).
The S&P is up 91.4% from the pandemic low on March 23, 2020.4
1 "S&P 500 Total Returns." Slickcharts, https://www.slickcharts.com/sp500/returns
2 The S&P 500 is an index. You cannot invest directly in the index. Past performance is not a guarantee of future results. Your portfolio results will differ from an index based upon the holdings in your account.
3 Foster, Sarah. "Two more rate hikes? Here’s how much higher the Fed could take rates this year, experts say." Bankrate, https://www.bankrate.com/banking/federal-reserve/how-much-will-fed-raise-rates-in-2022/
4 "S&P 500 (^GSPC)." Yahoo Finance, https://finance.yahoo.com/quote/%5EGSPC/history?fr=yhssrp_catchall
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