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The stock and bond markets appear to have stabilized to some degree, which is a great thing. Once we believe the negative volatility is behind us, we plan to jump back into the markets and hopefully ride the wave back up to the end of 2022 on a good note.
Overall, our portfolios are still in “be careful” mode until we see more signs of stability. One of our research companies has said the most important line in the sand is 4150 on the S&P 500. In July, the market closed at 4130, just below this crucial number. If the market jumps above this critical level, that could mean that the worst is behind us. Here are some pieces of evidence that the worst may be behind us soon.
The Federal Reserve will likely stop their interest rate increases when inflation is under control. This would be good for the economy and the stock market. This chart shows how much each of these assets has dropped in price since their peak. So things appear to be heading in the right direction.
The last time we had runaway inflation was in the 1980s. The Federal Reserve chairman at the time, Paul Volcker, used Fed policy tools to reduce inflation. As a result, the stock market responded positively, erased all losses within four months, and then had a great run-up for years. We’re hopeful the same thing will happen in 2022 as the Fed is aggressively using their tools to reduce inflation.
Agile Portfolio Management
As you know, we have many tools in our toolbox, including the ability to purchase investments that profit when the stock market goes down. This is called hedging. Because the current environment is highly challenging with significant ups and downs, we initiated a change recently from previous months this year: We decided to add an inverse fund again at the end of July.
It’s possible we’re going to continue to experience a global growth slowdown. With the Federal Reserve raising rates, that should further slow things down in the short term, so it’s a difficult balance. There is a chance the stock market will take another trip down before it ultimately heads higher again, and we aim to try to profit from that within our managed portfolios.
However, if we’re wrong and the market heads higher from here, we plan to change course quickly. Once we believe the market is low or possibly bottomed for good, we plan to buy stocks low. Our ultimate goal is to make money, so we’re using what we believe to be all the appropriate tools in our toolbox to accomplish that goal potentially. This is why we manage our active portfolios daily.
Future Market Outlook
Anything is possible in the short term. However, we believe that by year-end, stocks will rebound for many reasons, including low unemployment, the Coronavirus-fueled shutdowns and restrictions reducing worldwide (currently, there are lockdowns in parts of China), inflation peaking and then dropping, providing lower prices, consistent housing market prices despite high-interest rates, and consumer spending from Millennials. They have hit their peak spending years.
Here to Help
We would love to meet with you to discuss investments, retirement, college planning for kids and grandkids, tax preparation, health insurance, including Medicare supplemental and prescription drug plans, and other financial planning topics. Please contact our office at (586) 226-2100 to schedule a meeting today!
Please contact us immediately if you’ve had any changes to your income, job status, marital status, 401K options, address, or any other financial changes.
We hope you and your family have an excellent, safe, and healthy start to the summer!
Bob, Ken, Jim, Zach, and James
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