3 Things 9-26
Thing One A Matter Of Perspective How far will the stock market fall? That’s a popular question these days. Here are a few takes from familiar outlets: From bankrate.com: “…As you can see from the table, the average bear market since 1929 has resulted in a roughly 37 percent decline in the S&P 500 and it has taken an average of 344 days, or nearly a year, for the market to reach its bear market bottom. If these averages were to play out during the current bear market, investors could expect the S&P 500 to fall to about 3,017, or a roughly 22 percent decline from mid-July levels…” From Reuters.com: “…Goldman Sachs has cut its year-end 2022 target for the benchmark S&P 500 (.SPX) index by about 16% to 3,600 points, as the U.S. Federal Reserve shows little signs of stepping back from its aggressive rate-hike stance…” From bloomberg.com: “…The “inflation shock ain’t over” and an earnings recession will likely drive stocks to news lows, strategist Michael Hartnett said in a note…That suggests the current bear market, which the benchmark index confirmed in June, will end in October with the gauge at 3,020 points -- 23% below current levels, the strategist said…” The consensus seems to be that it’s heading down in the near term. Are the pundits right? Maybe. And if they are, that will make it painful for those of us currently invested, as it is unlikely that we will be able to completely avoid the carnage. But maybe that’s not the question we should be asking. For long term investors, the question should really be, how high can it go in the next 5, 10, 15, 20 years and beyond. If we take the lowest projected stock market bottom mentioned above, 3017, and extrapolate using the historical, long term average of roughly 10% (before inflation), the market would reach the following levels at the 5, 10, 15, and 20 year milestones: Year 2027 - 4800 Year 2032 - 7825 Year 2037 - 12,602 Year 2042 - 20,296 And if it grows a little slower going forward, say 5%, given all the “headwinds”: Year 2027 - 3850 Year 2032 - 4,914 Year 2037 - 6272 Year 2042 - 8,005 In any case, it will likely go up in the long term. So rather than trying to figure out where the bottom is when the market gets ugly, remember you’re in it for the long term. And remind yourself that if you stay invested and the market just does what it always has over the next 15 years, for example, you might have 4 times as much as you do now. It’s all a matter of perspective.
Thing Two A Rising Bond Yields Q & A Revisited A year and a half ago we posted three questions and anwers relating to bond yields. Given the current focus on inflaton and interest rates, we thought a look back would be appropriate. Q: Why is the 10-year yield significant? A: Per Investopedia.com: “The 10-year is used as a proxy for many other important financial matters, such as mortgage rates, and auto loans. This bond also tends to signal investor confidence. When confidence is high, prices for the 10-year drop and yields rise. This is because investors feel they can find higher returning investments elsewhere and do not feel they need to play it safe. When confidence is low, bond prices rise and yields fall, as there is more demand for this safe investment.” Update: Yields are well above the levels of a year ago. Q: Since interest rates are rising, should we be worried about inflation? A: Per CNBC.com: “It depends on who you ask, and what you are looking at. Do we see inflation in the real world? We do in commodities: Oil is approaching the highest since 2018, for example, and copper is at an almost 10-year high. But signs of consumer inflation, for example, have been muted, with inflation at or below 2% for many years.” Update: No matter who you ask, inflation is a big problem. Q: What do rising yields mean for the stock market? A: Per USA Today: “In the past three months, the 10-year Treasury yield has risen by over half a percentage point, a rapid move that is larger than 90% of all the three-month periods since 1990, according to UBS Financial Services. Still, stocks typically perform quite well during these periods. On average, the S&P 500 registers a 3.9% gain (16.5% annualized) when interest rates rise by more than half a percentage point, data from UBS Financial Services shows. While returns tend to be a bit lower in the three months after a big move in rates – 2.5% on average – they are no worse than a typical three-month period. The rise in yields does have implications for the stock market and could make shares of companies with high valuations less attractive. Those types of stocks tend to be technology companies, who are priced typically for growth and not for a steady return of dividends like consumer staples, utilities, and real estate companies. Rising rates tend to be favorable for more cyclical sectors, or companies whose businesses and stock prices tend to follow the business cycle. Those include sectors like consumer discretionary, energy, financials, industrials, and health care." Update: Stock indexes are being dragged down by the high-valuation tech stocks just as was noted and the cyclical sectors are holding up a little better.
Thing Three Just A Thought “We do not fear the unknown. We fear what we project onto the unknown.” - Teal Swan