Ron Rough, CFA, Chief Investment Officer, presents our October video market update and shares how FSA is responding.
October Stock Market Update Transcript
Hello, this is Ron Rough with a market update for October.
The year 2022 is shaping up as being the most challenging year, I would say, since 2008, and that’s even given the pandemic year of 2020. But that year, markets, even though they fell 35%, fell 35% in five weeks and then got on the road to recovery. Then back in 2018, stocks fell over 20% in the fourth quarter, but again, after December, they started to climb right back.
Here we are this year, ten months into this decline, and no real signs of recovery yet. So it’s been a very frustrating year for investors. On top of that, we’ve had two very strong countertrend rallies in March and in July that have made it very difficult to manage your way through this year.
So let’s just take a look at the pain that we’ve had this year. So you can see this chart. You’ve got all the indices. Stock indices are all down over 20% this year. Bond indices are down 15. Even the intermediate high quality bond index is down 15% which will be the worst year on record if we close anywhere near these levels. You can see the chart shows gold, even though it’s an inflation hedge, is down 7% this year. So even gold has not been the hedge we might expect.
The only place to hide this year is in T-bills, money markets, cash as it were. One of the benefits of interest rates going higher is that money market yields have actually started to go higher. The tradable money markets that we have available to us at Schwab are now all yielding over two and a half percent. So that’s where most of our money market assets are these days. So at least we’re getting some kind of yield. But again, with inflation running at 8%, that’s still a negative real return. So cash is king, but that’s only relatively speaking.
So given that, how have we reacted to the market? This next chart is, a little bit going on here. This black line, we have the S&P 500 for the year, ending at the end of September. These colorful lines here represent stocks, bonds, cash, and inverse funds that we’ve held in all of our portfolios throughout the year. We took all nine of the strategies and basically rolled them together, and so what you see is at the beginning of the year very low cash, less than 10%. Now, as the market began to sell off, you can see we began to raise cash. By the end of March we were at about 60, 70% in cash. Now, as the market had this rally in March, you can see how we leaned back into that slightly, and then as it rolled over in April, again, we began to build up cash so that by the end of June we were essentially out of the market. In our popular vernacular, we say that we’re on the beach. We’re not in the rough waters. We’ve come to the safety of the shore.
Now you can see that this chart shows that there’s still about 10% in equities, and that’s because some of our strategies don’t go a hundred percent to cash. All of the strategies that employ the safety network are basically out of the market, but we have other strategies that don’t go a hundred percent to cash. Then you can see in July we had this other strong rally that then again drew us back in a little bit .up to about maybe 30% in equities, 20%, in equities plus bonds. But then all of that rolled over.
So here we are at the end of September, again out of the market, on the beach. So of course, the question is, “Now what?” What direction could we go from here? Well, this final chart, the S&P 500 again, we have this green line is the 50-day moving average; the purple line is the 200-day moving average. Clearly, we’re in a downtrend. You can see we hit a low in June. Then we had that strong rally. We’ve rolled over, and we’re right back at those June lows.
And so, as we look at the market, there’s one of two directions. Seasonally speaking, there’s reason that this market could bounce, especially in a midterm election year. We could see a rally through the end of the year. Not to say that it would end the bear market, but we definitely could get a rally into year end. Historically speaking, that would be very plausible.
However, that may not happen. Inflation stays hotter than we expect, another bad turn in the war in Ukraine, further aggressive action from the Fed. Any of those things could push stocks down lower as we get into the end of the year. So, at this point, we’ll just play a wait-and-see game. Let the market tell us what direction it wants to go. No doubt the fourth quarter’s going to be just as interesting as the third quarter, but for now, that’s all.
So until our next update, thank you for watching and happy investing.
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