Financially Speaking
From Shabri
- Historically, the duration of bull markets is 6.7 years, and the duration of bear markets is 1.2 years. On average, bear markets occur about every 7.1 years.
- Missing even a few of the market’s best days can dramatically impact returns. In other words, would you know when the most trading days are going to happen so that you could get out of the market, and then, would you also know the exact day to get back in the market to benefit from the best trading day?
- Markets and portfolios can fluctuate dramatically in any given year. The two charts below illustrate annual fluctuations of the S&P (on the left) vs annual fluctuations of a diversified portfolio (on the right). Interestingly, during the time period between 1999-2002, the return for both is very similar. However, the volatility, or inter year gain or loss, is far less dramatic in the diversified portfolio.
While all of these statistics and graphs are useful, ultimately, we know that investing can be very emotional. Having a Financial Plan and strategy for managing all types of markets can help you visualize the bigger picture. We are always available to discuss this and other financial questions with you.In this quarter’s newsletter you will find Erik’s article on Fear and Greed, Sean’s article on Focusing On Your Financial Plan, our Quarterly Market Update and Moore After Hours (what we do when we are not at the office).
Your Portfolio
Fall 2022
From Erik Moore
Markets have been moving pretty wildly this year. One, two, and three or more percent moves up or down in a day have become relatively common over the past 9 months. There are a number of factors that would make a particular index swing like that, but there are two main things that drive the market regardless of what period we are looking at: fear and greed.Most are familiar with the old investing adage “buy low and sell high”, but interestingly enough, few actually follow that rule. More often than not, people will buy when markets are near their peaks, and sell when they are near their lows. If investors know that they should be buying low and selling high, why are they doing the opposite? It comes down to emotion. During bull markets, people feel that they are missing out on all of the money that is being made, get greedy, and begin to invest. During bear markets, people begin to fear that they will lose their money, get fearful that markets are actually a casino, and will sell their investments. This is the nature of the fear and greed cycle, which is visually represented below:
Now, this chart is not meant to imply that by understanding the fear and greed cycle, one can easily identify where the tops and bottoms of a market are. If that’s all it took, then all investors would never lose any money, and everyone would be rich. The reality is that timing markets is incredibly difficult, and even those who get paid millions of dollars to time markets are bad at it. To that point, this chart also does not suggest that an investor should be selling all of their investments at the euphoria or anxiety points, or that they should be investing irrationally largesums of money at the discouragement or dismay points. What understanding the fear and greed cycle can do, is reign in emotions throughout the peaks and troughs, and create enough context to remain disciplined in an investment strategy.In times where markets are highly volatile, like now, it’s easy to question an investment strategy that has been underperforming recently, or even one that has been doing reasonably well. Fear can begin to creep in, which can create the desire to make a drastic change to your investments. However, history shows us that is a mistake. The graphics below take a look at two different behaviors that can drastically reduce the long term value of your investments: being uninvested for varying amounts of the best market days from 1980 – 2022, and how different investment tactics would have fared investing $2000 per year from 2002-2022.
Source: FMRCo, Asset Allocation Team. *Growth reflects dividend reinvestment but not impact of taxes.Source: Schwab Center for Financial Research. *Cash example reflects Ibbotson US 30-day Treasury Bill Index. Stock examples include dividend reinvestment and exclude impact of taxes, expenses or fees.From these graphics we can see that technically, there is a way to have better than normal performance by timing markets perfectly. But as mentioned above, timing markets is nearly impossible, and missing only a few of the best market days is detrimental to creating maximum investment value.At the end of the day, keeping emotions associated with the fear and greed cycle away from your investment decisions is the best way to get the most out of your money. Discipline in the face of anxiety or euphoria has been, and will continue to be the best way to invest. Making small changes to mitigate losses during bear markets or maximize gains during bull markets can be useful, but only when they stay in line with a long term investment strategy.At Moore Wealth, we create tailored portfolios for our clients that are based upon a disciplined process that takes into account long term goals, and the current market environment. If you are beginning to feel anxious about the current markets, or need help creating an investment strategy or financial plan, feel free to contact us.
Fall 2022
From Sean Moore
Markets have had a rocky 2022, with no clear signs of improvement on the near-term horizon. In times like these, it can be tempting to take action with the hope that “doing something” will help to improve your situation. When this urge strikes, pause, and re-focus on your financial plan. Action may be warranted, but knee-jerk reactions that do not align with your financial plan can do more harm than good. In this article I’ll lay out a few steps you can take that should help you re-focus on your financial plan, and that can help you feel more confident at a time when confidence might seem to be in short supply.
First, control the “controllables.” When it comes to finances, people often worry – a better word might be fret – about factors over which they have the little or no control. The current environment is rife with opportunities to fret – about market performance, about government policy, or about macroeconomic forces, among others. None of the items I just listed are things that you have the ability to control or influence! Rather than fretting, re-focus on the factors within your financial plan over which you have at least some control. This might include saving and spending decisions, asset allocation and location, and employment earnings and duration. A straightforward action you can take: evaluate your budget – is it reasonable now, and in the context of your financial plan?
Next, determine if your plan is structured to meet realistic goals, and to account for a variety of market and economic environments. Most of us would be able to retire comfortably, and even achieve “stretch” goals, if we won the Mega Millions jackpot, or if we consistently saw greater than 25% portfolio returns. Does your plan rely on an enormous cash windfall, or are your goals based on unrealistic expectations of future earnings and savings rates? Does your plan rely on uninterrupted and/or above average portfolio returns? A straightforward action you can take: evaluate your goals – are they realistic, and are they achievable?
Finally, reassess your portfolio risk tolerance. Over the course of the last ten years or more – notably immediately following the short-lived recession we experienced in the spring of 2020 – it has been easy to fall into a trap of believing that you are comfortable with more portfolio risk than you really are. When market values seem to increase irrespective of the state of the world at large, it can be tempting to increase the riskiness of your portfolio in pursuit of outsized returns. The same is true in reverse in the current market environment: when market values seem to do nothing but trend down, it becomes tempting to “go to cash” to stem further losses. Your true risk tolerance shouldn’t fluctuate much, if at all, in light of market conditions. A straightforward action you can take: ask a member of the Moore Wealth team to send you a link to our risk assessment. It will take under ten minutes to complete, and will offer a clearer picture of how much portfolio risk you are really comfortable with.
Markets have experienced a rocky 2022, and you might feel tempted to “do something” as a result. Before taking any drastic action that might harm more than it helps, re-focus on your financial plan. If you could use guidance on how to do that most effectively and efficiently, give us a call. We’re happy to help.
Q3 Market Review
Fall 2022
Market Update for the Quarter Ending
Market Update for the Quarter Ending September 30, 2022
September Sell-off Caps Challenging Quarter
Equity markets saw widespread declines in September, bringing the major indices to their lowest closing levels for the year. The S&P 500 fell 9.21 percent during the month and 4.88 percent during the quarter; the DJIA fell 8.76 percent for the month and 6.17 percent for the quarter; and the Nasdaq Composite fell 10.44 percent for the month and 3.91 percent for the quarter.
Per Bloomberg Intelligence, as of September 16, 2022, with 99.8 percent of companies having reported actual earnings, the blended earnings growth rate for the S&P 500 in the second quarter was 8 percent. This is up notably from the estimates for 4.1 percent earnings growth at the start of earnings season.
While fundamentals were supportive during the quarter, technical factors were another story. All three major U.S. indices finished the month well below their respective 200-day moving averages for the sixth consecutive month.
Internationally, technicals were challenging. The MSCI EAFE Index lost 9.35 percent in September and 9.36 percent during the quarter. The MSCI Emerging Markets Index dropped 11.67 percent for the month and 11.42 percent for the quarter. Both indices finished September below their respective 200-day moving averages (as has been true every month this year).
Fixed income markets also experienced widespread declines due to rising interest rates. The 10-year Treasury yield rose from 2.98 percent in the second quarter to 3.83 percent in the third quarter, bringing long-term rates well above pre-Covid-19 pandemic levels.
The 2-year Treasury yield increased from 2.92 percent in the second quarter to 4.22 percent in September. Rising rates were driven by expectations for higher short-term interest rates from the Federal Reserve (Fed) this year and into 2023. The Bloomberg Aggregate Bond Index declined 4.32 percent for the month and 4.75 percent for the quarter.
High-yield fixed income also experienced sell-offs. The Bloomberg U.S. Corporate High Yield Index dropped 3.97 percent for the month and 0.65 percent for the quarter due to the rising rate environment and widening credit spreads in September. Spreads, however, finished the quarter largely unchanged.
Rising Rates Pressure Investors
Third-quarter market turbulence was primarily driven by rising interest rates, caused by increased investor expectations for higher short-term rates. The Fed hiked the federal funds rate a combined 150 basis points (bps) at its July and September meetings to slow economic growth and combat inflation, and more rate hikes are expected at the upcoming November and December meetings.
Long-term interest rates have been muted—the 10-year Treasury yield spent most of the post-crisis period below 3 percent—and the recent increase rattled markets. While this year’s rate increases and market volatility have served as a headwind, there are signs that the worst impact may be behind us.
Economic Growth Continues Despite Housing Slowdown
Housing performed well in 2020 and 2021, but rising mortgage rates and home prices have contributed to a sharp slowdown this year. The annual pace of existing homes sales fell to their lowest level in August since 2020. The pace of existing home sales peaked in January at a rate of 6.49 million sales per year, with sales declining every month since and ending August at an annualized rate of 4.8 million sales.
The national average 30-year mortgage rate increased from 3.3 percent at the start of the year to just over 7 percent in September. In the intermediate to long run, the slowdown in housing sales should help support the Fed’s attempts to combat inflation, but housing is currently a significant contributor.
Even though the housing sector was weak, the rest of the economy showed signs of growth. More jobs than were expected were added in July and August. Job openings are plentiful and the unemployment rate remained well below historical averages.
August saw solid retail sales and personal spending growth, with retail sales above economist estimates. The Conference Board Consumer Confidence survey for September showed consumer confidence at its highest level since April.
Business spending and confidence also showed signs of improvement last quarter. The ISM Services index indicated that service sector confidence increased in August to its highest level since April, and manufacturer confidence remained in expansionary territory during the month and quarter.
Core durable goods orders increased in both July and August, marking six consecutive months with increased orders. As you can see in Figure 1, core durable goods orders have been solid most of the year, even if the pace of growth has slowed.
Figure 1. Manufacturer’s Now Orders: Durable Goods Excluding Transportation, 2021–2022
Source: U.S. Census Bureau
Overall, while there are signs that the Fed’s higher rates are starting to slow growth, with housing being the best example, the economy as a whole continues to expand.
Market Risks Remain Despite Growth
Even though the economy continues to grow, there are still very real risks to markets. Short-term market performance can be heavily impacted by other factors. While we’ve likely seen the worst impact from rising rates and high inflation on markets, it’s possible inflation will remain stubbornly high at year-end. The Fed’s restrictive monetary policy is also expected to continue slowing economic activity.
Beyond economic risks, the rest of this year also has political concerns. The U.S. November mid-term elections could see one or both chambers of Congress switching control, in addition to important state and local elections. There are also political risks abroad, including the continued Russian invasion of Ukraine and the general slowdown in global economic growth.
We’ve seen signs that inflation may be starting to slow and there is hope that the recent market pain has set investors up for better times ahead. Historically, periods with sustained sell-offs led to strong market returns. Despite short-term risks, the long-term picture is more encouraging.
Given the risks and potential for additional short-term shocks, a well-diversified portfolio that matches investor goals and timelines remains the best path forward for most. As always, you should reach out to your financial advisor to discuss your current plan if you have concerns.
All information according to Bloomberg, unless stated otherwise.
Moore After Hours
Fall 2022
Moore Outreach
We are proud of the communities that we live in and feel that it is important to contribute to those communities by active involvement in organizations that support the people who live there.
Erik was recently named to the board of directors for the Arc Baltimore. The organization supports people with developmental disabilities to lead fulfilling lives with a sense of belonging, purpose and meaningful relationships.
Sean was recently named to the board of directors for Mental Health Association of Frederick County. Through education, advocacy, empowerment, and treatment, MHA helps everyone face their challenges and make lasting positive change.
Moore Events
We were thrilled to host our first in-person event since Covid lock downs at the end of September. We’ve welcomed many new clients over the past few years and were delighted to resume our New Client Dinners. The dinner was held at the newly renovated clubhouse at Cattail Creek Country Club. It was wonderful to spend an evening with new clients and the people who had introduced them!
Moore Wealth
Fall 2022
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.
Moore Wealth is located at 50 Carroll Creek Way, Suite 335, Frederick, MD 21701 and can be reached at 301.631.1207. Securities and Advisory Services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Advisor.
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Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, and Sam Millette, manager, fixed income, at Commonwealth Financial Network®.
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