The Stock Market Bottom: Are We There Yet?

The Bottom: Are We There Yet?

May 13, 2022

It’s looking like this Friday the 13th will be a lucky one for the stock market—a seemingly rare day of gains after a tough slide downhill.

But even counting today’s rally, the S&P 500 is set to mark its sixth consecutive weekly decline and the Dow Jones Industrial Average is heading for its seventh—something we haven’t seen since 2011 and 2001, respectively. Meanwhile, the tech-heavy NASDAQ Composite index was down 6.4% for the week as of Thursday.

Suffice to say, market participants are looking longingly for the bottom. And the sell-off hasn’t been limited to stocks. More than $200 billion in cryptocurrency market value evaporated in 24 hours on Wednesday, with some $1 trillion in wealth lost over the last month. Investors are likewise finding fault with bonds and gold.

What gives?

With the consumer price index rising 8.3% over the past 12 months through April, the Federal Reserve’s inflation-fighting credibility is under attack. While we’d all like to see inflation pressures ease, traders and investors weren’t thrilled to hear Fed Chair Jerome Powell say that “the process of getting inflation down to 2% will include some pain.” No kidding.

If the Fed thinks there’s more pain on the way, is it time for investors to pack it in and stockpile money under their mattresses? Hardly. While it can be uncomfortable and upsetting to see quarterly losses on account statements, long-term investors will encounter bear markets along the path to growing wealth in the stock market. This week, we’ll try to put those bear markets into context.

This Is No Time to Get Out of the Market

When the tech bubble burst in mid-2000, startup euphoria faded and stocks fell 50%, give or take. Tech equities with an “i” or “e” in front of their names (or a dot-com at the end) but no earnings crashed back to earth. Indiscriminate selling followed—the proverbial throwing the baby out with the bathwater—taking good companies down with the bad.

A few years later, during the global financial crisis (GFC), the stock market tumbled more than 50% from October 2007 to March 2009. This time, an overheated housing market and financial malfeasance spurred by an easy-money environment caused the bull market to burst at the seams. Stocks plunged—the good and bad alike.

Fast-forward to today: The negative narrative is inflation and a potential recession. Traders are selling everything under the sun, from bleeding-edge tech to established market giants, while bitcoin beats a path to the bottom. The selling appears indiscriminate to us. And while it’s a painful moment for investors, now is not the time to upend your long-term portfolio out of near-term concerns.

From the peak—not the bottom, but the very top—of the tech bubble in March 2000 through Thursday night, the S&P 500 index has gained 293%, compounding money at a 6.4% annual rate. If we start at the bottom of the tech bear market (October 2002), the S&P 500 has compounded at 10.8%—a 647% gain.

From the market top preceding the GFC through Thursday, the S&P 500 has compounded at an 8.7% annual rate. By investing in the broad stock market during the GFC, your money compounded between 8.7% and 16.6%.

Not too shabby.

You’ve heard us say it before: It takes time in the market, not market timing, to build wealth. It is seldom more important to walk this talk than when markets are posting losses.

At times like these, try to take a step back and ask if you are still on track to achieve your financial goals—despite the recent market declines. Taking stock of where you are relative to your goals can help you avoid making a costly decision due to short-term concerns. As described above, bear markets end, and bull markets have more than made up for those periodic declines. Please give us a call if you would like to talk about what’s going on—we’re here for you.

Chart of the Week: How Common Are Stock Market Drawdowns?

Director of Research Jeff DeMaso:

While investing in the stock market has been rewarding over time, it often doesn’t feel that way. And it’s no wonder—if we measure from prior highs, the S&P 500 index has spent almost half of the time down 5% or more from its peak over the last four-plus decades.

Here are the stats: Since 1980, the S&P 500 index was down 5% or more from its prior high 49% of the time, down 10% or more 35% of the time, and down 20% or more 19% of the time through May 11, 2022.

Despite the extensive number of drawdowns, the market has seen price appreciation of 3,621% over the period—an 8.9% annualized rate.

To put it in a dollar-value perspective, even though nearly a fifth of the time was spent in a bear market (a decline of 20% or more), a $1,000 investment in the S&P 500 made in 1980 would’ve been worth $37,209 through Wednesday night (and that’s not counting dividends).

I would not be surprised if someone remade this chart 40 years from now and it showed similar results.

Stock Market Drawdowns Are Common
Note: Chart shows daily index level for the S&P 500 from 1/2/1980 through 5/11/2022 along with periods of drawdowns exceeding 5%, 10% and 20%. Sources: Morningstar, Adviser Investments.

Crypto: Making a Play for Your 401(k)    

Today’s reader question is about Fidelity’s move to offer bitcoin as an option in 401(k) plans.

Director of Research Jeff DeMaso:

This has been a hot topic since Fidelity announced it was queuing up to allow companies to include bitcoin in their 401(k) plans. The Department of Labor—which regulates 401(k) plans—has cast shade on the idea. Nonetheless, company boards are weighing whether bitcoin should be part of their 401(k) lineups. And participants are asking, “Why not buy bitcoin in my retirement account if I can?”

Bitcoin is a bit of a lightning rod right now, so I get the attention. The crypto market has been under considerable pressure this year and (as we said above) the price of bitcoin plunged recently. But this question isn’t really about bitcoin. It’s about including a speculative asset—any speculative asset—as an option in a 401(k). Yes, bitcoin is speculative. It could be a home run or a zero—or both depending on your time frame!

Does it make sense to offer or hold an asset within a 401(k) that arguably has as much chance of going into freefall as it does of going up many multiples? Realistically, some companies already do this by allowing employees to buy their company stock through their 401(k). If you work at, say, a biotech and buy your company stock in your retirement savings plan, is that really very different?

At the individual investor level, it may make sense to have some of your 401(k) funds invested in what is effectively a lottery ticket; it’s just a question of how much. Which may be why the Department of Labor is balking at Fidelity’s plan to allow participants to sock as much as 20% of their portfolio into bitcoin.

If you are a bitcoin bull, you are itching for the opportunity to buy the cryptocurrency in a tax-deferred retirement account. And bulls would say that if you don’t want to own bitcoin, no one is making you buy it, so what’s the harm in offering it as an option? Well, the harm is that people may overconcentrate—in their retirement account—in an asset that goes under. Enron, anyone? In that case, many employees who loaded up on Enron stock not only lost their jobs but also took massive hits to their 401(k)s when the company went down.

I’m not saying bitcoin is going to zero. I’m also not saying it’s sure to be a home run. I’m simply saying that you can’t rule either out. So if bitcoin does come to a 401(k) near you, speculate accordingly.

Financial Planning Friday
Emergency Fund Fundamentals

An emergency fund forms the cornerstone of a strong financial foundation. When we work with our clients to build their financial plans, the first thing we determine is if they have enough rainy-day savings to handle unforeseen emergencies.

An emergency fund is exactly what it sounds like—money set aside for unexpected situations. Let’s face it, life throws us all a curveball on occasion: The roof springs a leak, your car breaks down, a family member needs emergency surgery or your job is eliminated.

The trouble is that we’re not always great at preparing for the unexpected. While no one can predict the future, we can prepare for it.

Your rainy-day fund should be easily accessible. That doesn’t mean a cookie jar full of cash or a mattress stuffed with dollar bills, though. A simple checking account at your local bank with ATM access can be a great option. A money market account with check-writing privileges through your brokerage is another.

Of course, you also need to determine how large your emergency fund should be. A long-standing rule of thumb is to keep six months of living expenses at the ready. Two-income households might budget for a minimum of three months of living expenses. High-spending households might need more.

Building up six months of expenses may seem daunting. We believe in setting small, achievable goals—start by saving just one month of expenses. Once you’ve done that, you can begin working on other savings needs while you continue to build your fund.

If you would like our assistance creating an emergency account, determining how much should go into it and then funding it, please contact your wealth management team. We are happy to help!

Any topics you’d like us to address in a future FPF section? Please contact your team or write to us at info@adviserinvestments.com. We’d love to hear your suggestions.

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

Portfolio Manager Adam Johnson appeared on Fox Business yesterday to explain why reaching a market bottom is a process and to speak about the key indicators he’s watching closely.

Meanwhile, Senior Vice President and Fixed Income Manager Chris Keith blogged answers to questions he received about bonds following our recent bond market webinar.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade dug into the factors behind the tech sell-off, and Portfolio Manager Steve Johnson discussed crypto carnage and excessive selling.

Looking Ahead

Next week brings useful reads on manufacturing and a bevy of insights on the state of American consumers and the businesses that depend on them. Namely through what’s revealed in housing market reports (builders’ confidence, new permits and construction, existing home sales) and retail sales data.

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 Investments 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, and have nearly 4,000 clients across the country and over $7 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. Our minimum account size is $350,000. 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 13, 2022, prior to the market’s close.

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