Tag: volatility

Understanding the Market Correction – 2023

Written by Minich MacGregor Wealth Management on November 2, 2023. Posted in Featured, News, Posts.

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

Investing Like Water

Written by Minich MacGregor Wealth Management on October 4, 2022. Posted in Uncategorized.

Lately we’ve been thinking about water. There are water problems everywhere – too much in the southeast and not enough out west. Our thoughts are with you.

We know thinking about water might seem like an odd thing for financial professionals to think about. Especially during times like these, with interest rates on the rise, inflation remaining stubbornly high, and volatility dominating the markets.

But, as investors, this is exactly the time to think about water.

To illustrate what we mean, consider this quote, usually attributed to the great Chinese philosopher, Lao Tzu:

“Consider that nothing is softer or more flexible than water, yet nothing can resist it.”

Even in the best of times, many investors are rigid and inflexible in their approach. It’s in the hardest of times that this rigidity comes back to bite them. For instance, many investors take the approach that they must stay invested all the time. Since the whole point of investing is to grow your money, they are constantly in growth mode. Though, investors like this simply fear missing out on future growth. As a result, they are constantly climbing towards the top of the mountain, even when the cliff becomes straight and sheer, without a single ledge or toehold to cling to.

As of this writing (9/30/2022), the S&P 500 is down 24.8% for the year and the NASDAQ is down 32.4%. For the first time since 2009, the first three quarters of 2022 have all been negative. It’s been a very challenging year!

Perhaps that slide will continue, perhaps it won’t. We don’t know; no one does. What we do know is that, when the cliff gets sheer, it can be a long drop down to the bottom.

Other investors, perhaps burned by this approach, become inflexible in another way. They sit out the markets permanently, or invest only in bonds, or some other approach that makes them feel “safe”. Better to risk gaining nothing than to risk losing anything. As a result, these investors never move at all. They simply stay where they are…even if where they are isn’t where they want to be.

Despite the volatility we’ve seen this year, the S&P 500 is up nearly 60% since March of 2020.¹ Perhaps that number will go up, perhaps it won’t. We don’t know; no one does. What we do know is that we’d hate to miss out on that kind of journey.

Now consider water.

Have you ever seen a major river from above? If so, you’ll have seen how it always takes the easiest course. Sometimes it flows straight; sometimes it bends and curves back on itself. Sometimes it flows fast and strong; sometimes, it barely moves at all. It cannot fight against gravity, so it never tries to go uphill. But it always keeps moving, from source to destination.

When you think about it, our entire investment philosophy here at Minich MacGregor Wealth Management is based on emulating water. As you know, we use a combination of technical and fundamental analysis to help us find and follow market trends. Sometimes, the markets trend up. Sometimes, the markets trend down. Sometimes, the trend is short; other times, it’s long. Sometimes, different sectors of the markets will trend in different directions. (This is why we don’t try to invest in everything, but choose our investments based on their relative strength compared to other, similar investments.)

Whichever way the trend goes, though, we don’t fight it. Like water and gravity, we know that you can’t fight it. Instead, we adapt to it. When the trend is down, we may move into cash to protect against undue risk. When the trend is up, we do the opposite. Sometimes, this shift may occur month to month or even week to week. But we are always on the lookout for opportunities to invest your money where it will do the most good. Like water, we try to follow the path of least resistance, adapting our approach to the lay of the land. Sometimes we will be in growth mode; other times we will be defensive. Just as water will speed up or slow down, flow straight or curve backward, sometimes we will, too.

Experience has convinced us that this approach – being flexible and adaptable – is the surest way to your destination. By not trying to constantly scale the cliff, we do not risk the fall. And by not being afraid to move, we do not risk forever staying in one place. By being like water, we stay soft, flexible…and irresistible.

The reason we’re telling you all this, is because investors have so much noise to contend with right now. On Tuesday, September 13 alone, the news came out that the inflation rate for August was at 8.3%, higher than many experts hoped for.² This means it’s even more likely that the Fed will continue to raise interest rates, which is hardly welcome news for most companies. The result? The Dow fell over 1100 points.² For rigid, inflexible investors, numbers like this represent a major obstacle. Some will crash into it in their attempts to plow through. Others won’t even bother trying. For us, however, it’s merely another data point.

Over the coming weeks, it’s possible we’ll have more days like September 13. We don’t know how long this volatility will continue; no one does. Either way, our strategy will help us get around it. So, while the headlines might seem scary, we hope you take comfort in the fact that we’ll continue adapting to changing market trends with great flexibility, all based on your needs and goals.

We’ll be like water.

¹ “S&P 500 Historical Data,” Investing.com, https://www.investing.com/indices/us-spx-500-historical-data

² “Stocks Fall on Hotter-Than-Expected Inflation Data,” The Wall Street Journal, https://www.wsj.com/articles/global-stocks-markets-dow-update-09-13-2022-11663065625