Skip to main content

Tag: economy

Understanding the Market Correction – 2023

You probably saw the news: On October 27, the S&P 500 officially slid into a market correction.

A correction is when the markets decline 10% or more from a recent peak.  In the S&P’s case, the “recent peak” was on July 31, when the index topped out at 4,588.1  On Friday, the index closed at 4,117 – a drop of 10.2%.1 

Market corrections are never fun, and there’s no way to know for sure how long one will last.  Historically, the average correction lasts for around four months, with the S&P 500 dipping around 13% before recovering.2 Of course, this is just the average.  Some corrections worsen and turn into bear markets.  Others last barely longer than the time it took for us to write this message.  (On Monday, October 30, for example, the S&P actually rose 1.2% and exited correction territory.3) Either way, corrections are not something to fear, but to understand – so that we can come through it stronger and healthier than before. 

To do that, we must understand why the markets have been sliding since July 31.  We use the word “slide” because that’s exactly what this correction has been.  Not a sharp, sudden drop, but a gradual slide, like the bumpy ones you see on a playground that rise and fall on the way to the ground.   While the S&P 500 dropped “at least 2% in a day on more than 20 occasions” in 2022, that’s only happened once in 2023, all the way back in February.4    

At first glance, it may seem a little puzzling that the markets have been sliding at all.  Do you remember how the markets surged during the first seven months of the year?  When 2023 kicked off, we were still coming to terms with stubborn inflation and rising interest rates.  Many economists predicted higher rates would lead to a recession.  But that didn’t happen.  The economy continued to grow.  The labor market added jobs.  Inflation cooled off.  As a result, many investors got excited, thinking maybe the Federal Reserve would stop hiking rates…or even start bringing rates down. 

Fast forward to today.  The economy continues to be healthy, having grown an impressive 4.9% in the third quarter.5  Inflation is significantly lower than where it was a year ago.  (In October of 2022, the inflation rate was 7.7%; as of this writing, that number is 3.7%.6)  And the unemployment rate is holding steady at 3.8%.7  But the markets move based either on excitement for the future, or fear of it – and these cheery numbers no longer generate the level of excitement they did earlier in the year. 

The reason is there are simply too many storm clouds obscuring the sunshine.  While inflation is much lower than last year, prices have ticked up slightly in recent months.  (We mentioned the inflation rate was 3.7% in September; it was 3.0% in June.6)  As a result, investors are now expecting the Federal Reserve to keep interest rates higher for longer.  Seeking to take advantage of this, many investors have moved over to U.S. Treasury bonds, driving the yield on 10-year bonds to its highest level in 16 years.  Since bonds are often seen as less volatile than stocks, when investors feel they can get a decent return with less volatility, they tend to move money out of the stock market and into the bond market.

As impressive as Q3 was for the economy, there are cloudy skies here, too.  This growth was largely driven by consumer spending – but how long consumers can continue to spend is an open question.  Some economists have noted that Americans’ after-tax income decreased by 1% over the summer, and the savings rate fell from 5.2% to 3.8%, too.5  Mortgage rates are near 8%, a 23-year high.8  Meanwhile, home sales are at a 13-year low.9  All this suggests that the Fed’s rate hikes, while cooling off inflation, have been cooling parts of the economy, too.

Couple all this with violence in the Middle East, political turmoil in Congress, and a potential government shutdown later in November, and you can see the problem.  Despite the strong economy, investors just aren’t seeing a good reason to put more money into the stock market…but lots of reasons to think that taking money out might be the prudent thing to do.  It’s not a market panic; it’s a market malaise.    

So, what does this all mean for us? 

We mentioned how the markets operate based on excitement for the future, or fear of it.  But that’s not how we operate.  We know that, while corrections are common and often temporary, they can worsen into bear markets.  Furthermore, any decline can have a significant impact on your portfolio, and by extension, your financial goals.  So, while our team doesn’t believe in panicking whenever a correction hits, neither do we believe in simply standing still.  Instead, we’ll continue to analyze how both the overall market – and the various sectors within the market – are trending.  We have put in place a series of rules that determine at what point in a trend we decide to buy, and when we decide to sell.  This enables us to switch between offense and defense at any time.  This, we feel, is the best way to keep you moving forward to your financial goals when the roads are good…and the best way to prevent you from backsliding when they’re bad. 

In the meantime, our advice is to enjoy the holiday season!  Our team will continue to focus on investments, so our clients can focus on why they invest: To create happy memories and live life to the fullest with their loved ones.  Happy Holidays! 

  

SOURCES:

1 “S&P 500,” St. Louis Fed, https://fred.stlouisfed.org/series/SP500

2 “Correction,” Investopedia, https://www.investopedia.com/terms/c/correction.asp

3 “Stocks rebound to start week,” CNBC, https://www.cnbc.com/2023/10/29/stock-market-today-live-updates.html

4 “S&P falls into correction,” Financial Times, https://www.ft.com/content/839d42e1-53ce-4f24-8b22-342ab761c0e4

5 “U.S. Economy Grew a Strong 4.9%,” The Wall Street Journal, https://www.wsj.com/economy/us-gdp-economy-third-quarter-f247fa45

6 “United States Inflation Rate,” Trading Economics, https://tradingeconomics.com/united-states/inflation-cpi

7 “The Employment Situation – September 2023,” U.S. Bureau of Labor Statistics, https://www.bls.gov/news.release/pdf/empsit.pdf

8 “30-Year Fixed Rate Mortgage Average,” St. Louis Fed, https://fred.stlouisfed.org/series/MORTGAGE30US

9 “America’s frozen housing market,” CNN Business, https://www.cnn.com/2023/10/19/homes/existing-home-sales-september/index.html

   

We’ve Come So Far

Headlines are looking grim again, so let’s pause and take stock.

Why are the headlines terrible?

Because the media loves drama. This is not news to you or me or anyone who pays attention. The 24-hour news cycle is there to whip up emotions and keep us glued to the latest “BREAKING NEWS.”

So, what’s behind the noise and should we worry?

Before we jump into unpacking the news, let’s take a moment and remind ourselves of how far we’ve come since the pandemic began.

You can see it right here in this chart:

We’ve recovered the vast majority of jobs lost since the bottom of the pandemic’s disruption last April. The economy is still missing several million jobs to regain pre-pandemic levels, but we’ve made up a lot of ground, and jobs growth is still strong.1

In fact, there are more job openings right now than job seekers to fill them.2

But there’s an important caveat to the chart above.

The monthly jobs report is what economists call a “lagging” indicator, meaning that it’s telling us where the economy was, not where it’s going.

To figure out what might lie ahead, economists turn to “leading” economic indicators that help forecast future trends.

So, what are the leading indicators telling us about the economy?

A couple of the most popular indicators are manufacturing orders for long-lasting (durable) goods, since companies don’t like to order expensive equipment unless they expect to need soon.

Another one is groundbreaking (starts) on new houses, which indicate how much demand builders expect for housing.

Let’s take a look:

Both indicators suggest continued (if bumpy) growth. Now, those are just two sectors, and we want to be thorough, so let’s take a look at a composite.

The Conference Board Leading Economic Index (LEI) gives us a quick overview each month of several indicators.

It increased by 0.7% in June, following a 1.2% increase in May, and a 1.3% increase in April, showing broad, but slowing growth.3

What does that tell us? That the economy still has legs.

Will the delta variant derail the recovery?

A serious slowdown due to the delta variant seems unlikely, but we could potentially see a bumpy fall, especially in vulnerable industries and areas with surging case counts.

There’s also some potentially good news about the delta variant that we can take from other countries.

India and Great Britain both experienced delta-driven surges earlier this summer.4

And what happened?

A steep and scary rise in case counts and hospitalizations…followed by a rapid decline.

It seems that these fast-moving delta waves might burn themselves out.

Unfortunately, these surges come with a painful human cost to patients, overburdened medical staff, communities, and families.

But, if this pattern holds true in the U.S., it doesn’t appear that the economic impact will be heavy enough to derail the recovery.

All this to say, it’s clear that the pandemic is still not over.

But we’ve come such a long way since the darkest days of 2020 and the road ahead still seems bright (if a little potholed).

Please remember to take panicky headlines with a shaker or two of salt.

We’re here and we’re keeping watch for you.

Is the Sky Falling (again)?

There’s a lot going on in the world right now.

We thought this message was going to be about the $3.5 trillion budget deal or what to do with any child tax credits that may be heading your way.

But then global markets jolted on fears of new viral variants.

Is the sky actually falling?

Could a big correction happen?

After hitting record highs in previous days, markets tumbled Monday, sending the Dow 700+ points lower.1

Why?

Mostly fears of a COVID-19 resurgence caused by the delta variant that could derail the economic recovery.

Case numbers are rising globally, even in countries with high vaccination rates, and the surge could lead to a return to travel restrictions and business closures.2

Could these market jitters cause a 10%+ correction?

Absolutely.

Should we panic and freak out?

Definitely not.

Here are a couple of reasons why:

Summer months can bring higher volatility, perhaps because of lower trading volume, making bad news shake the market harder.3

We’ve had a pretty long winning streak, and corrections are part and parcel of a healthy market, especially when we’re near all-time highs.

New variants and higher case counts are a threat. However, vaccination rates are continuing to rise, and experts don’t think that we’ll see the devastating health outcomes we saw last year.4

Could the delta variant cause the economy to slow down?

It’s hard to say at this point. The rosy projections about the economy have been based on a swift return to normal from the shortest recession in history.5

If surging case counts cause a resumption of business and travel limits, we could definitely see a hit, especially in recovery-dependent industries like airlines, cruises, and hotels.

Supply chain issues are still causing materials shortages, creating delivery delays of goods, and potentially triggering slowdowns in industries such as building and construction.6

However, consumer spending is still very strong and the economy is in way better shape than it was last year.7

Bottom line: we could see some economic complications due to the delta variant and we’re likely to see more market volatility ahead, especially if economic data disappoints.

We’re keeping an eagle eye on the trends and will be adjusting strategies for our clients if we feel they need to be changed.

Have questions? Please reach out. We’re always here to help.


P.S. A massive $3.5 trillion budget deal is working its way through Congress.8 It’s got a lot of moving parts that may affect taxes, Medicare, and much more. We’ll reach out when we know more about how it’s likely to shake out.

1https://www.cnbc.com/2021/07/18/stock-market-futures-open-to-close-news.html
2https://www.reuters.com/business/healthcare-pharmaceuticals/delta-covid-variant-now-dominant-worldwide-drives-surge-us-deaths-officials-2021-07-16/
3https://www.nasdaq.com/articles/volatility-gauge-suggests-tactical-trading-during-summer-doldrums-2021-07-19
4https://www.nature.com/articles/d41586-021-01696-3
5https://www.cnbc.com/2021/07/19/its-official-the-covid-recession-lasted-just-two-months-the-shortest-in-us-history.html
6https://www.washingtonpost.com/us-policy/2021/07/20/biden-delta-coronavirus-economy/
7https://www.reuters.com/business/finance/us-retail-sales-unexpectedly-rise-june-2021-07-16/
8https://www.cnbc.com/2021/07/14/democrats-3point5-trillion-budget-package-funds-family-programs-clean-energy-medicare-expansion.html

Trending Now: Interest Rates & Inflation

One year.  It seems incredible, but it’s been one year since COVID-19 struck our shores.  One year since the World Health Organization declared a pandemic.  One year since the markets crashed and the schools closed and we realized just how much we take toilet paper for granted. 

Since then, the markets have recovered and risen to new heights.  The economy, meanwhile, has recovered more slowly.  Now, a quarter of the way through 2021, we have a new president, several new vaccines, and a completely different world than the one we knew before all this started.  We’ve also seen some renewed volatility in recent weeks.  This has many of our clients asking, “Where are the markets going next?  What should we expect for the rest of 2021?” 

We’ll address those questions in this email.

As you know, there are two types of long-term market situations: Bull markets and bear markets.  But the whole “bull vs bear” concept can also be used to describe two types of investor sentiment.  Bulls are investors who have a positive, or “bullish”, view of where the markets are headed.  Bears, meanwhile, generally have negative, or “bearish” expectations.  So, we’re going to let both animals debate each other, each presenting their case for why the markets will have a positive year or a negative one.  We’ll start with the Bull, move onto the Bear, and then give the Bull a chance for a short rebuttal.  Finally, as financial advisors, we’ll give you our view. 

The Bullish View

Last year’s market crash was sudden, swift, and deep.  But in the grand scheme of things, it didn’t last very long.  In fact, it took only six months for the markets to recover.  (By contrast, it took the markets almost six years to recover after the Great Recession.)  Since then, the markets have risen to new highs. 

Three things propelled the markets to this remarkable turnaround: Low interest rates, federal stimulus, and the expectation of a major economic recovery.  Let’s start with the first one.  To help juice up the economy, the Federal Reserve lowered interest rates to a historic degree.  Low interest rates promote more borrowing and spending, two pillars our economy is based on.  They also help people buy homes and encourage businesses to invest more in themselves.  (Including hiring more workers.) 

Congress, meanwhile, has passed three major stimulus packages in the last year.  The most recent bill was signed by President Biden on March 11.  The America Rescue Plan Act of 2021, as it’s called, provides $1.9 trillion in aid for both businesses and consumers.1  Among other things, the Act extends COVID unemployment benefits through Labor Day, provides $1,400 direct payments to individuals, expands certain tax credits, and grants billions to small businesses to help meet payroll and retain workers.1  The first two stimulus packages had a positive impact on things like retail sales and consumer spending, and it’s widely expected that this one will, too. 

This combination of low interest rates and government stimulus have helped the economy tread water while we deal with the virus.  But much of the market’s rise is due to something else: Expectation.  Specifically, expectation that the pandemic will end, and the economy will hit the accelerator. As more people are vaccinated and case numbers fall, the thinking goes, more and more of society will re-open, releasing a flood of pent-up demand.  Demand to travel, to eat out, to catch a movie in theaters, you name it.  Add the latest round of stimulus to the mix, and suddenly Americans have both extra money in their pocket and the means to spend it.  In other words, all the ingredients are there for a major economic comeback, the likes of which we haven’t seen in decades. 

Now, we seem closer than ever to that expectation becoming reality.  As of this writing, there are three approved vaccines in the U.S., with more than 115 million doses administered.2  (40 million people are currently considered fully vaccinated, approximately 12.3% of the total population. 2)  Currently, our nation is averaging over 2 million shots each day.2  It’s no surprise, then, that cases in the U.S. have been falling for weeks.  In fact, as of March 19, cases are down over 14% over the last two weeks.3 

We’re not out of the woods yet, not by a long shot.  Masks and social distancing will continue to be a part of our lives for some time yet, and of course there are relatively new variants of the coronavirus to deal with.  But if we can maintain this trajectory, increasing the number of people vaccinated and reducing the number of people sick, that could do wonders for our economy.  It could lead to more of society re-opening, leading in turn to more jobs, more consumer spending, and greater company earnings.  Greater earnings, of course, usually lead to higher stock prices. 

The Bearish View

So, in light of all this, how can anyone have a negative view of where the markets are headed?  It all comes down to a single word:  Inflation.

Inflation.  It’s a scary-sounding word that conjures up images of German children stacking useless money in the 1920s, or gas rationing in the 1970s.  For decades, economists have monitored it relentlessly.  The Federal Reserve considers managing inflation to be a core aspect of its mission.  That’s partly why our nation’s inflation rate has been relatively stable over the last twenty years. 

But recently, some analysts and investors have begun stressing over inflation again.  They don’t deny that the economy is poised to grow.  They just worry that it will grow too much, too fast.  There’s a word for this, too.  Economists call it overheating.

When an economy overheats, it essentially no longer has the capacity to meet all the demand it faces from consumers.  Some producers will simply not be able to supply all the goods their customers want.  Other producers, to keep up with that demand, will be forced to raise prices.  It’s a classic example of the Law of Supply and Demand.  (When the demand for something outpaces its supply, the price goes up.)  For example, if everyone suddenly decides to fly to that vacation spot they’ve been putting off for a year, the cost of air travel would skyrocket.

If the economy were to grow too quickly, prices would rise across the board – and the value of our currency would drop.  This, essentially, is inflation: When the general price level rises, a dollar simply pays for less than it used to.  That makes it much harder for people to buy the goods and services they need.  Or to pay off their debts.  It makes it harder for businesses to hire new workers or pay the workers they already have.  The upshot?  When inflation gets too high, consumer spending plummets, unemployment jumps, and economic booms turn into economic busts. 

Some experts worry this is what’s in store in 2021.  They see the economy as a garden hose that’s been tied up into a knot.  Untie the knot – or re-open the economy too quickly – and the water will burst out with sudden, savage force. 

So, here’s what this has to do with the stock market.  Normally, the Federal Reserve combats inflation by raising interest rates.  Higher interest rates tend to cool off the economy, because they prompt people to save their money instead of spending or borrowing it.  A cooler economy decreases inflation, and gradually things go back to normal.  The problem is the stock market has become accustomed to the Fed’s low interest, “easy money” policies.  Low interest rates mean that many types of investments, most notably bonds, simply don’t provide the same return on investment as they would in a high-interest rate environment.  That drives more and more investors into the stock market to get the returns they need.  But what happens when interest rates go up?  Consumers and businesses could cut back on spending, which in turn could cause earnings to fall and stock prices to drop. 

Fear of inflation, and fear of higher interest rates.  That’s the bearish view in a nutshell. 

Rebuttal

We promised the Bull would have the opportunity for a short rebuttal, so here it is.  There are two main reasons for thinking this fear of high interest rates are overblown.  The first is that, even if inflation does go up – which it likely will – we have a lot of room to work with before it becomes a problem.  In 2020, the inflation rate was only 1.2%.4  That’s well below the 2% mark the Fed generally aims for, and nowhere close to the mind-boggling numbers we saw in the late 70s and early 80s.  (In 1979, for example, the inflation rate was 13.3%.4

The other reason is that there’s no reason to assume the Federal Reserve will automatically raise interest rates just because inflation goes up.  Why?  Because the Fed itself has said that it won’t!5  Currently, the Fed sees stimulating the economy and boosting employment to be far bigger priorities than tamping down on inflation, and recently, the Fed Chairman suggested interest rates would remain low at least until 2022. 

Our View

We’ve told you what the Bulls and Bears think.  So, here’s what we think. 

Here at Minich MacGregor Wealth Management, we don’t focus on guessing what the Fed will do, or anyone else.  We don’t have a crystal ball.  No one does!  That is why we base our strategy on both technical and fundamental analysis.  We analyze – and take advantage – of market trends, relying on the Law of Supply and Demand rather than fighting it. 

Historically, an improving economy leads to a stronger stock market.  If that happens in 2021, wonderful!  But if interest rate fears worsen and volatility goes up, we are ready to play defense and move to cash.  Remember, we don’t need to “buy and hold” even when there’s a Bear roaring in our face.  If there’s a general rise in prices and inflation skyrockets above what the Fed can handle, we don’t have to ride out another market crash like so many investors do.  We’ll obey the rules of our strategy and do what the trend dictates.  If our technical signals indicate major volatility on the horizon, we’ll be prepared. 

It’s been a year since the pandemic began.  A year since some of the worst market turmoil in a long time.  We got through that by being flexible, disciplined, and diligent, and we’ve been rewarded.  So, that’s what we’ll continue to do. 

If you have any questions or concerns about the market, please feel free to contact us.  In the meantime, enjoy the upcoming spring season!       

SOURCES:

1 “The American Rescue Plan Act Greatly Expands Benefits through the Tax Code in 2021,” Tax Foundation, March 12, 2021.  https://taxfoundation.org/american-rescue-plan-covid-relief/

2 “How is the COVID-19 Vaccination Campaign Going In Your State?” NPR, March 19, 2021.  https://www.npr.org/sections/health-shots/2021/01/28/960901166/how-is-the-covid-19-vaccination-campaign-going-in-your-state