The Bear's Outside the Tent

The Bear Market Beckons

Please note: This update was prepared on Friday, May 20, 2022, prior to the market’s close.

The bears inched closer to overrunning Wall Street this week. On Friday, the S&P 500 dipped into bear market territory before closing just above the threshold—namely, a decline of 20% from the previous market high. The driver: Worries about economic recession.

Although the beast has been kept at bay for weeks, that technicality has been little comfort to many who’ve felt the bite of tumultuous trading.

Former highfliers are already in their own individual bear markets: Apple, Microsoft, Amazon, Tesla, Google, Facebook, Nvidia and Netflix are all down between 22% and 70% in 2022. Collectively, according to The Wall Street Journal, these eight companies account for nearly half the stock market’s decline this year.

And the damage hasn’t been limited to big tech. Big-box store Target fell 25% in a single day this week after reporting tighter margins due to higher costs. Fellow retail giant Walmart is down nearly 20% this week.

The Retail Canary

Retailers were responsible for one of the bigger dents in trader sentiment this week, with three disappointing earnings reports from the aforementioned Target and Walmart, plus Kohl’s. All reported that higher prices were beginning to put a crimp in consumer spending and chip away at corporate profits. Lowe’s and Home Depot also reported seeing transaction counts fall—though their revenues were still up due to higher prices.

The fear is that these retail reports represent the canary in the coal mine as the noxious influence of inflation spreads across the economy, inspiring consumers to cut down on discretionary spending. Inflation takes its highest toll on low- to moderate-income consumers, so retailers like Target and Walmart may be particularly vulnerable to the sentiment shift. We’ll have more insight into those numbers through next week’s consumer spending and income reports.

Bear Bells

What’s an investor to make of major price declines like these at the individual stock or index level? A bell may be your best deterrent when walking in bear-occupied woods, but you can’t prevent or deter a bear market with a jingling racket. What you can do is think more like an investor and less like a trader.

For instance, steep market drops have often proved to be buying opportunities. If you purchased shares in an S&P 500 index fund on any day the index fell 3.5% or more, your average return over the next 12 months was 25.6%. You made money in 55 out of the 65 times this occurred. Buying on big down days has rewarded patient investors eight out of 10 times. If you have dry powder to add to your portfolio, this is a great time to do so.

We know that volatility and market pullbacks can challenge even the most disciplined investor’s resolve. But even a bona fide bear market doesn’t herald an economic recession. The two are quite different animals. In fact, only nine of the 17 bear markets from the Great Depression through the end of 2020 were accompanied by a recession, according to investment manager Invesco. We think that’s worth considering when the press tries to link the two as inextricably intertwined.

Chart of the Week: Bulls Outrun Bears

Director of Research Jeff DeMaso:

The S&P 500 index dodged bear country today, but I think we can all agree that it’s felt like a done deal for weeks.

While bear markets are challenging, one way I “bear” them is by not thinking of them as punishment. Bear markets are the fare we pay to ride the long-term compounding train that is the stock market.

In my opinion, it is a ride worth enduring because bulls have easily outrun bears over time.

To put some stats behind the chart: The average bull market ran for about five years and returned 158%. In contrast, the average bear market (peak to trough) lasted a little over a year, with an average decline of 36%. The average return one year after the bottom? 43%.

So, if this is an “average” bear market, then we are roughly halfway through—both in terms of length and drawdown. Of course, no bear market is average. What is clear is that if we are, in fact, in a bear market, then we are much closer to the bottom than we were five months, or even five weeks, ago. And history tells us that, as much as possible, we should stick around to participate in the returns coming out of a bear market.

Chart Showing Bull Markets Last Far Longer Than Bear Markets
Note: Chart shows cumulative S&P 500 index price returns on a monthly basis, resetting to 0% with the start of each extended period of gains or losses (bullish and bearish markets, respectively), from September 1957 through April 2022. Note that the 2009 decline reached -56.8%, slightly off the bottom scale displayed. Sources: Morningstar, Adviser Investments.

Financial Planning Friday
All About 529 Accounts

May 29 is (almost) here and we thought we’d take the opportunity to discuss some of the benefits of the other 5/29—529 education savings accounts.

529 plans are tax-advantaged investment accounts designed to help you save for tuition and expenses related to private K–12 and higher education. Anyone can open a 529 account for a designated beneficiary or contribute to the plan once it’s open. Plans are state-sponsored, generally in partnership with a mutual fund company or institute of higher learning. However, you aren’t limited to selecting a school in the state that sponsors your 529.

Getting started: First, evaluate the investment options available to you, as they are not uniform from state to state. Second, check to see if you’d receive a tax deduction on your contributions if you elect to use your home state’s plan. (Several states allow you to deduct contributions regardless of which state’s plan you invest in—click here for more details.) Finally, consider the costs associated with each plan—like other investment choices, fees vary.

Tax benefits: The main appeal of 529 plans is their tax friendliness; think of them like a Roth IRA, only for education savings rather than retirement. Contributions to the account are made with after-tax dollars, and growth of investments therein is tax-free. Plus, any withdrawals you make to pay for qualified education expenses are also untaxed. Withdrawals used to pay for expenses that aren’t qualified are subject to a stiff penalty, however—you will need to pay ordinary income tax plus a 10% penalty on any nonqualified plan withdrawal.

Special considerations: 529s can work well as wealth-transfer and estate-planning vehicles. You can make a one-time contribution of up to $75,000 ($150,000 if married, filing jointly) for as many beneficiaries as you like and choose to treat the deposits as if they were made over a five-year period for gift-tax purposes. The benefit to those who can afford to do so is twofold: It moves a big chunk of money out of your estate in one fell swoop and it front-loads the 529 plan with a large sum that can immediately begin compounding upon itself as its investments grow.

And if a beneficiary decides they don’t want to go to college, the account owner can change the beneficiary to another qualified family member penalty-free.

It’s easy to see why 529 plans are such a popular way to save for education expenses. If you are interested in learning more, click here to read our special report on 529s or listen to our podcast on saving and investing for education.

Podcast: Analyzing Market Turmoil

Both stock and bond markets have been in a tumultuous drawdown for most of 2022. Is there any light at the end of the tunnel? Or do inflation, high interest rates and a slowing economy mean more pain is in store for investors? Portfolio Manager Charlie Toole, Portfolio Manager Steve Johnson and Director of Research Jeff DeMaso lead you through the trends they’re seeing in today’s markets, including:

  • Whether we’re in for bear market turmoil
  • The resurgence of fundamentals
  • Why inflation has proven so sticky

There have been more downs than ups so far in 2022. But staying the course is still the savvy move. Listen now to find out why!

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.

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

No trades.

AIQ Tactical Defensive Growth

No trades.

AIQ Tactical Multi-Asset Income

No trades.

AIQ Tactical High Income
No trades.

Adviser Investments in the Media

This week, Portfolio Manager Adam Johnson spoke to Fox Business about Target’s disappointing sales and the latest earnings and employment numbers, while Chief Investment Officer Jim Lowell visited the network to cover the hidden upsides of bear markets and what’s been going on in China. Jim also appeared on CNBC World, opining on whether the market’s already priced in a recession.

Chairman Dan Wiener spoke to Traditional Fund Intelligence about where the outflows from some of the biggest index funds are going as investors pull back.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade discussed the benefits of bonds, while Portfolio Manager Steve Johnson offered his thoughts on the inflation debate happening on Wall Street.

Looking Ahead

Next week, we’ll get a look at revised GDP numbers, new and pending home sales, several updates from the supply side of the economy (manufacturing and service indexes, capital equipment, and durable goods orders), and perhaps most significantly, updates on consumer spending, income, sentiment and inflation expectations.

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, May 20, 2022, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein 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.

Purchases and sales of securities listed above represent all securities bought and sold in each strategy during the period stated. Each strategy’s portfolio generally includes more holdings in addition to the transactions listed above and in some cases the securities listed above may only represent a small portion of the particular strategy’s complete portfolio. Further, the securities listed above are not selected for listing based on their investment performance; thus it should not be assumed that any of the securities listed above were profitable or will be profitable, nor should it be assumed that future recommendations will be profitable. Clients and prospective clients should only make judgements about a strategy’s performance after reviewing the strategy’s composite performance information. There is no assurance that each security listed above will remain in the strategy’s portfolio by the time you have received or read this email. Securities are listed for informational purposes and are not intended as recommendations. Existing investor accounts may not participate in all transactions listed above due to each account’s particular circumstances.

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