Bearing the Bear Market

Bearing the Bear Market

Please note: This update was prepared on Thursday, September 29, 2022, prior to the market’s close.

Our thoughts are with everyone affected by Hurricane Ian. We hope you remain safe.

On Monday, the bear market finally arrived for the Dow Jones Industrial Average as it dipped 20% below its January high. The Dow was simply following on the heels of major market barometers like the S&P 500 and NASDAQ Composite, both of which had already entered their own bear markets earlier this year.  

Persistent inflation and central bankers’ efforts to combat it remain foremost on investors’ minds, triggering a flight from riskier assets and fueling a pervasive bearish tone on Wall Street. While market environments like this are anxiety-producing, long-term investors know that they are transitory— and that keeping an eye on our overall financial objectives matters more than how much the market moves week to week.

Since the S&P 500’s 1957 inception, it has compounded at a 7% annual rate—before counting dividends. That gain was earned over the past nearly seven decades despite wars, recessions, inflation, bubbles and multiple bear markets.

By our count, there have been 10 instances when the S&P fell 20% or more from a prior high (the standard definition of a bear market). Had you bought the index the day it first fell into bear market territory, you would’ve earned a positive return seven out of 10 times over the following year, with gains ranging from 12% to 59%. We can’t guarantee stocks will be higher a year from now—no one can. But we do know that even the worst bear markets have ended, and stocks went on to both recoup their losses and compound investors’ wealth further over time.

Here’s what else we’re focused on and why it matters:

  • Treasury sellers overwhelmed buyers and the yield on the benchmark 10-year U.S. Treasury bond briefly climbed above 4% for the first time since October 2008 before reversing course. The move came in reaction to events overseas: The Bank of England floated plans to purchase U.K. bonds to offset new Prime Minister Liz Truss’ proposed and unfunded tax cuts. Speculation that Japan may need to sell its U.S. Treasury holdings to fund its central bank’s effort to shore up the yen added to further turmoil in the debt market. (We take a look at where fixed-income investors may be able to find value below.)
  • Consumers were sending mixed signals this week as shoppers pulled back on spending while claiming in surveys their confidence is on the rise. Orders for durable goods—big-ticket items like appliances and computers—fell slightly in August from the previous month. And Apple told suppliers it would scrap a planned iPhone production increase after projected global demand softened.
  • The housing market is also creating a good news/bad news dynamic, as new residential housing construction has fallen around 13% since April. Homebuilder confidence has dropped to levels last seen just before the 2006 bursting of the housing bubble (though it was also lower than it is today in 2012, 2014 and 2020). Yet the good news is that lumber prices have returned to pre-pandemic levels as construction projects slow, which may already be helping with the cost of buying a new home.
  • To that end, home prices in America’s 20 biggest cities experienced their first decline in 10 years in July. Still, would-be buyers are getting cold feet: 15% of purchase agreements were canceled in August, up from 12% at the same time last year. The red-hot pandemic housing market—spurred by those seeking more living space as working from home surged—has been overdue for the correction that appears to have arrived.

Chart of the Week: High-Yield Bonds Say Not To Panic

Interim Chief Investment Officer Jeff DeMaso 

Signs of investor panic seem to be everywhere. Whether it’s the Cboe Volatility Index (Wall Street’s “fear gauge”) earning prime placement on newscasts, traders amping up purchases of puts (a bet that the market will fall) or simply reading recent investor surveys, fear is the dominant sentiment. I understand the unease.

One glaring exception to this apparent gloom can be found in the high-yield, or “junk bond,” market. When bond investors fret about the market and the economy, they typically flock to safe assets (e.g., Treasury bonds) and flee risky assets (like junk bonds, which have lower credit ratings due to their higher default risk). The net result is that junk bond yields rise faster than those available on safety-oriented Treasury bonds. The difference in yields is known as the yield spread, or “spread.”

A wide spread between junk bond and Treasury bond yields typically indicates investor fear. Yet, while yields on junk bonds have risen to around 9.5%, their spread over Treasurys has not grown dramatically because Treasury bond yields have also been on the rise. At 5% or so, the spread is bigger than it was at the beginning of the year—a sign that investors are more nervous than they were. But it’s not particularly wide by historical standards. Typically, in times of stress and heightened levels of investor fear, the spread has reached 8% or more.

Note: “High-Yield Spreads” represented by the ICE BofA US High Yield Index Option-Adjusted Spread, which shows the difference in yield between junk bonds and Treasury bonds with similar maturities. “Distressed Level” is a spread of 8% or more. Chart shows monthly spreads from 1/1/97 through 9/28/22. Source: ICE Data Indices, LLC.

So, while the junk bond market suggests investors are on edge, we also conclude that traders are not overly worried about the road ahead. Meanwhile, stock markets and investor sentiment surveys suggest bearishness matches levels seen during the early days of the COVID-19 outbreak as well as the global financial crisis of 2007–2009. Is it stock investors or bond investors who have it right? Only time will tell, but we’ll continue to keep an eye on junk bonds, both for opportunities and as a potential signal for what’s to come.

Finding Value in Bonds

After a year of stinging losses and turmoil in the bond market, Interim Chief Marketing Officer and Director of Content Jacque Murphy sat down with Senior Vice President, Fixed Income Manager Chris Keith—aka “The Bond Guy”—for his latest insights and analysis. You can find their full conversation here, but we thought Chris’ take on cash would be of broad interest.

JM: Chris, if someone has extra cash available, what should they do with it other than bury it in the backyard?

CK: I see no reason to dig up the yard when better options are available. If an investor has cash to invest but is unsure where to go, there’s a great waiting room for them—short-term Treasury bonds. Three-month and six-month T-bills are yielding roughly 3.30% and 3.90%, respectively. That may not seem like much, but it’s a matter of perspective. It’s been a long time since an investor could earn 3% or better on a short U.S. government bond. Since the early days of the pandemic, the average yield has been 0.54% on a six-month Treasury, so today’s 3.90% level seems sky-high in comparison.

Short Treasurys are an attractive credit-risk-free option for investors who prefer to wait this period out but want to earn a better rate than they’ll receive sitting in a money market fund. An added bonus is that Treasury bond income is tax-exempt at the state level.

For more from Chris and Jacque’s “State of the Bond Markets” discussion, click here.

Fine-Tune Your Medicare Coverage Now

Manager of Financial Planning Andrew Busa

Medicare—federal health insurance coverage for people 65 and older—is a pivotal part of your retirement plan. With the Annual Election Period (AEP) fast approaching (it runs from Oct. 15 through Dec. 7), Medicare recipients must decide whether to make changes to their plan. But consumer beware: The devil is in the details.

Here are four key things to know about Medicare’s Annual Election Period:

  1. AEP basics. This two-month window enables anyone already enrolled in Medicare to change their supplemental coverage. While the term “open enrollment” indicates that this period is “open” to anyone who’s eligible for Medicare, that’s not the case. If you’re within the seven-month window around your 65th birthday and are ready to sign up for coverage, there is a separate process called the Initial Enrollment Period.

  2. Your current coverage. It is important you understand your existing benefits before considering a switch. For instance, Medicare Parts A and B—commonly referred to as “Original Medicare”—offer basic coverage that is the same for everyone. (Broadly speaking, Part A covers hospitalization and Part B covers outpatient costs.) After that, you’ll need supplemental coverage to ensure you have adequate health care throughout your retirement. You can bridge the gaps in Original Medicare by enrolling in a Part C, also called Medicare Advantage, or a “Medigap” plan, both of which are supplemental plans administered by private insurance companies. You can also opt to access Part D, the Medicare prescription drug benefit. The AEP allows you to choose these supplemental coverage options as your health needs change.

  3. What you can change. The AEP allows you to:
  • Switch from Original Medicare to Medicare Advantage
  • Switch from Medicare Advantage to Original Medicare
  • Switch from one Medicare Advantage plan to another
  • Enroll in Part D prescription coverage or change or drop your prescription plan

If you move to Original Medicare from a Medicare Advantage plan, you will be eligible to enroll in a Medigap plan. However, be aware that you aren’t guaranteed entry into Medigap when you switch from Medicare Advantage—you may need to apply through a traditional insurance underwriting process and/or accept a higher premium based on your health status.

  1. Your options. To make fully informed decisions about supplemental Medicare plans, you need to objectively assess your needs. The costs for Medicare Advantage and Part D plans often change annually, so it pays to maintain a list of your regular prescriptions to make comparison-shopping easier. If you can, project what your medical costs might look like over the next year to decide if you should switch plans.

For more on Medicare, check out our handy Medicare reference guide and our podcast on the topic.

As always, if you have questions related to your specific situation, please don’t hesitate to get in touch with your wealth management team. We stand ready, willing and able to help—after all, we are The Planner You Can Talk To.

Ask Us a Question!

We’re always interested in the topics or concerns you might like us to comment on. As much as we try to cover the investment and economic fields every week, we know there’s still more that you might want to hear about. Ask us a question about investing, the markets or financial planning and one of Adviser’s wealth management or investment specialists will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY.

Strategy Activity Update

Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.

Dividend Income
No trades
AIQ Tactical Global Growth

Buy Cash

Sell Fidelity MSCI Utilities Index ETF (FUTY)

Sell iShares US Broker-Dealers & Securities

AIQ Tactical Defensive Growth

No trades

AIQ Tactical Multi-Asset Income

Buy Cash

Sell iShares TIPS Bond ETF (TIP)

Sell SPDR Bloomberg Convertible Securities ETF (CWB)

AIQ Tactical High Income

No trades

Adviser in the Media

Chairman Dan Wiener’s and Jeff DeMaso’s Vanguard expertise was in high demand this week; they appeared in Citywire, RIABiz, Ignites and InvestmentNews to explain the fund giant’s decision to shutter an ETF for the first time.

Meanwhile, Portfolio Manager Adam Johnson gives his take on “buying in the hole” and on Fox Business to make sense out of the markets’ reactions to inflation news.

In this week’s Adviser Takeaways, Senior Research Analyst Liz Laprade analyzed past bear markets to understand what we’re seeing today, while Manager of Financial Planning Andrew Busa discussed the basics of mixing and matching your Medicare plan.

Looking Ahead

Next week, we’ll get a wide range of economic reads, including on manufacturing, the service sector, construction spending, pending home sales, job openings and the September unemployment rate.  

As always, please visit for our timely and ongoing investment commentary. In the meantime, all of us at Adviser wish you a safe, sound and prosperous investment future.

About Adviser

Adviser is a full-service wealth management firm, offering investment managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit or call 800-492-6868.

Please note: This update was prepared on Thursday, September 29, 2022, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein—including but not limited to the Your Question Answered section—should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

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