The Bear Is Out of Hibernation--What Next?

The Bear Is Out of Hibernation—What’s Next?

June 17, 2022

Some weeks it’s hard to be an investor—the past couple, especially so.

June has been exceptionally challenging, as both stocks and bonds moved decidedly lower due to growing inflation fears spurred by last Friday’s consumer price index (CPI) report; it was a sucker punch to traders expecting to see signs of easing inflation. No such luck—the May reading reached its highest level in more than four decades.

Federal Reserve Chairman Jerome Powell and company’s announcement Wednesday of a 0.75% increase to the fed funds rate—the largest interest-rate hike since 1994—met traders’ increased expectations, sparking a brief relief rally. But pessimism returned in spades on Thursday, with the major indexes notching losses of more than 3%. The S&P 500 index is solidly in bear market territory—having declined more than 20% from its peak at the start of the year.

Bonds, too, have faltered lately. The yield on the benchmark 10-year Treasury climbed as high as 3.50% on Tuesday as prices fell. Fixed-income traders have been repositioning for continued, aggressive rate-hiking on the part of the Fed. Increased inflation fears have also contributed to bonds’ declines.

Predicting the market’s next short-term move is a guessing game. What we do know is that we’ve been in bear markets before. They are sure to create anxiety and nervousness, yet ultimately, stocks have always recovered and markets have moved to new highs.

If you’re feeling concerned or even anxious about the current market’s behavior, a robust financial plan is the key. Let’s talk through your concerns and build a financial plan that provides you peace of mind. We can revise your current plan or create one in short order.

Buying the Dip

Buy low, sell high sounds a bit glib when markets are dropping. But that doesn’t mean it’s bad advice. Inspired by some research from Bespoke Investment Group, Director of Research Jeff DeMaso took a look at some of the S&P 500’s most brutal drops on record to illustrate what buying the dip can do.

Since the index’s 1957 inception there have been 33 five-day drops of at least 10% (including the most recent one). These steep drops tended to cluster around significant market events, such as Black Monday in October 1987, when stocks fell 20% in a single day. Four five-day drawdowns happened as the tech bubble burst in 2000, nine occurred during the global financial crisis and another nine around the outbreak of the COVID-19 pandemic. Right there, that’s 80% of the 10% five-day drops centered around just four events.

Clearly these events aren’t a common occurrence, yet they also aren’t without precedent. So how did the market do after those dramatic five-day drops? One year later, the median return was about 25%. Only twice has the market taken a 10% or greater decline in five days and still been down a year later.

Numbers like these should be encouraging for anyone looking to put money to work in this market or in search of a good reason to stay the course with their investment plan. As Jeff likes to say, “Stay calm and carry on.”

Chart of the Week: How Low Will Sentiment Sink?

Director of Research Jeff DeMaso:

It feels like everyone’s got a frown on their face lately.

The University of Michigan has been asking consumers how they feel about the economy for decades. The response this month was the most pessimistic ever recorded. You read that right: Consumers are more concerned today than they have been at any point since the 1970s. And that period includes some episodes of major turmoil, such as the bursting of the tech bubble, the 9/11 attacks, the global financial crisis and the COVID-19 pandemic—to name but a few.

It’s not just consumers, though. Small business owners are also worried about the road ahead. According to the National Federation of Independent Business, which has also been running a survey since the 1970s, business owners are more concerned about the next six months than they’ve ever been!

On the one hand, these negative views could be self-fulfilling, impacting our behavior and resulting in the very recession that people fear is coming.

On the other hand, it means that expectations are really low—it wouldn’t take much in the way of good news to turn sentiment. I’d argue that things don’t necessarily have to improve by much to see public opinion shift for the better.

Sentiment is often a noisy indicator, but at extremes it can signal the economy or the markets may be near a turning point. Businesses and consumers think conditions are worse than they’ve ever been…maybe that’s reason for some optimism?

Note: Chart shows index levels for the University of Michigan Consumer Sentiment index (12/31/1978 through 6/10/2022) and the National Federation of Independent Business’ (NFIB) Small Business Outlook for General Business Conditions index (12/31/1978 through 6/10/2022). Data is quarterly from 1978 through 1985 and monthly thereafter. Source: Bloomberg.

Podcast: Navigating the Bear Market

The bear is back. Is a recession close behind? Or are we in one already and just don’t know it? And will inflation ever come down? It’s been a bruising ride for investors so far in 2022, and the Federal Reserve’s sought-after soft landing seems ever more unlikely. Portfolio Manager Steve Johnson and Chairman Dan Wiener talk about the reasons behind this broad sell-off and whether there’s any light at the end of this tunnel. Topics include:

  • Can the Fed tame inflation?
  • Will bonds continue to underperform in this environment?
  • Are there areas of the market that look attractive?

Making it through a bear market takes grit and determination. But there’s every reason to believe we can make it through this one. Dan and Steve explain what’s different this time and how investors can keep their eyes on the prize. Click here to listen now!

Your Financial Plan
Homeowners Coverage: What You Need to Know

It isn’t all doom and gloom out there. The summer is here and, along with it, some great weather. Now’s the time that homeowners begin to roll up their sleeves and get on with home improvement projects. But before you put hammer to (or through) drywall, we’d like to suggest reviewing your homeowners insurance to make sure you have adequate coverage.

Homeowners policies typically incorporate three major types of coverage: Home (covering loss or damage to the structure), contents (loss of your personal property) and liability (legal fees and judgments). Here are a few questions to think about:

Are you insuring your home and the land it’s built on? You shouldn’t base your replacement coverage on your home’s appraised value; this will include the value of your land. To get a true estimate of the value of your physical home, base your estimate and coverage level on recent per-square-foot replacement costs in your area. This information should be available from your local homebuilders’ association.

In the event of a total loss, will your insurance cover the cost of replacing all your personal property? As you’re reading your policy, determine whether the contents of your home are insured under “replacement cost” or “actual cash value.” If your favorite armchair gets ruined, actual cash value will pay you what it’s worth today. Replacement cost coverage will replace your chair with a new one of like kind and quality. We recommend the latter option.

Is your liability coverage sufficient and do you have other coverage that might apply? Have you installed a swimming pool or fire pit since you last reviewed your liability insurance? You might want to consider raising your coverage. Many homeowners who also own and insure cars or boats purchase a “liability umbrella” that can provide blanket coverage for any liabilities you might be subject to. Note that you may have to increase your underlying liability coverages through your homeowners or car insurance when purchasing an umbrella policy. Why? These policies typically require a certain minimum underlying coverage level; if you are below that, you will need to increase it before you can buy the umbrella insurance.

What isn’t covered in your homeowners insurance? Insurers offer both “open perils” and “named perils” policies. A named perils policy only covers losses that are listed in the policy. Open perils policies insure against all losses except for those that are specifically excluded in the policy. If you have the latter type, it’s important to review those exclusions. You may find that losses due to common hazards (termites, mold) or natural disasters (floods, earthquakes) aren’t covered. If you’re living in an area where you are at risk for one of these natural occurrences, consider separate insurance.

If a review of your documents has turned up some deficiencies or you aren’t clear on what is or is not covered, feel free to contact your wealth management team at Adviser Investments. We can advise you on what to look for in your documents and what you may wish to discuss with your insurance agent if you determine your coverage isn’t sufficient. The points above touch on some key items but certainly aren’t exhaustive. We’re happy to help you comb through the fine print.

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 Investments’ experts will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY.

Adviser Investments in the Media

This week, Chairman Dan Wiener spoke to CNBC’s “ETF Edge” podcast about taking advantage of market declines, while Chief Investment Officer Jim Lowell appeared on Fox Business to talk about how investors can mount an effective defense in volatile times and to give his take on the Fed’s 75-basis-point policy move. Portfolio Manager Adam Johnson spoke to the same network about why oil stocks may have hit their peak and what the bear-bull ratio is telling us about a potential market bottom.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade discussed why the market was pricing in a 0.75% hike before the Fed’s announcement, while Portfolio Manager Steve Johnson offered his thoughts on why fear is not an investment strategy.

Looking Ahead

Next week is a short one for Wall Street and Adviser Investments, with markets closed Monday in observance of the Juneteenth holiday. We will be back at our desks on Tuesday and the report schedule includes looks at jobless claims, home sales, inflation expectations, consumer sentiment, and manufacturing and service sector indexes.

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

About Adviser Investments

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 www.adviserinvestments.com or call 800-492-6868.


Please note: This update was prepared on Friday, June 17, 2022, prior to the market’s close.

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