Hopes for a new bull market were running wild after this summer’s comeback rally; however, we are seeing the return of volatility and downside risk once again. Cracks appeared in bond sectors at the beginning of August. The U.S. Aggregate Bond Index sank nearly 3% for the month. Traditionally safe bond sectors all felt the pain: Munis (-3%), Investment Grade Corporate Debt (-5%), and Long-Term Treasuries (-8%). With prices falling, rates reentered their uptrend. Ten-Year Treasury rates started August at 2.65% and ended at 3.13%.
Stocks started a nine-week rally with small caps leading the way. The S&P 500 gained over 17% from June to mid-August. Since then, stocks have spent the last three weeks giving it back, dropping 9%.
Big rallies during a bear market are to be expected. During the financial crisis, stocks rallied 12%, 18%, and 24% on the way to the bottom. No one can time the bottom precisely which is why FSA uses caution when allocating during new rallies to not only guard against reversals but also to participate in a bull run countertrend.
Mixed messages continue to obscure the direction of our economy. With policymakers prioritizing the fight against inflation, growth has taken the backseat. Using tools such as increased borrowing rates and fiscal spending packages (i.e., the Inflation Reduction Act, $740 billion), the government is taking a defensive posture. A “soft landing” scenario may still be in the cards. Strong labor market figures, a rebound in consumer confidence, and declines in COVID cases worldwide will aid in supporting stability and growth. Also, the U.S. dollar has peaked at a 20-year high (110 on the U.S. Dollar Index). In the short-term, a strong dollar helps offset domestic inflation by boosting purchasing power when importing goods and services.
Year-to-date, American stocks have demonstrated a greater resilience than both European and Asian markets. As global capital seeks the best opportunities, American investments will likely benefit from this resilience.
The summer rally had led us to gradually move the portfolios back into the markets, but the late August reversal has caused us to pause that process. A sustained break in the S&P 500 Index’s level of 3900 will trigger most of the FSA Safety Nets® that are tied to general stock funds.
Some more eclectic investment selections have provided durability to portfolios. Managed futures funds and a Solar ETF, for example, have provided opportunities to diversify as upward trends have become evident. Finally, we continue to seek the best return on money market funds.
Please remember to inform your advisor of any changes in your life that might affect your investment objectives and how we manage your money.
Disclosures are available at https://fsainvest.com/disclosures/market-update/.