Is the bear market over?

Let’s discuss.

Good news first: inflation might be cooling off. Maybe.

The latest inflation data suggests we could be moving past the peak in some areas.

• Gas prices are down¹
• Freight prices are down²
• Overall measures of inflation are off their highs³

Great, right?

The data is certainly pointing in the right direction, but it’s too soon to celebrate.

Why? Well, it’s just not enough data yet to call it a sustained trend.

We’re also seeing signs that persistent inflation has led consumers to shift their spending.

That could make inflation improvements uneven AND result in some winners and losers across different sectors.⁴

Winners could be travel and auto companies benefiting from pent-up demand.

Losers could be homebuilders and luxury brands hit by higher interest rates and shifts in shopping trends.

Are the bulls back in town?

Markets rallied for weeks on optimism about data and possibly FOMO – fear of missing out on the action.⁵

Can we trust a summer rally? Is the bear market over?

Probably not. There are a lot of hurdles ahead, including the Federal Reserve’s interest rate hikes and earnings results from companies affected by those consumer spending changes, and election season.

One big question still remains: can the Fed bring down inflation without a “hard landing” that tips the country into recession?

Opinions are mixed, unsurprisingly. Some analysts think there’s a narrow path to success.⁶

Others think the risk of a recession is very high and that investors are underestimating how far the Fed will go to lower inflation.

Be prepared for more bumps ahead.

In other news, what’s in the Inflation Reduction Act for you?

Before we dive into the guts of the new legislation, we have one caveat:

While new deals always garner big headlines, it’s very possible that court challenges, post-election shakeups, or future negotiations could change a lot of the details inside.

That said, here are a few things to keep an eye on:

The Act mainly addresses two big areas: green energy and Medicare.

On the green side, the bill includes a slew of incentives to boost adoption of things like solar panels and electric vehicles.

However, many of the incentives may not be immediately available, as many of the specifics need to be figured out. Want a full rundown of the tax credits and rebates? Here you go.

On the Medicare side, the bill includes some interesting prospects for retirees:⁷

• Starting in 2023, insulin costs for Medicare enrollees will be capped and vaccine cost-sharing will be eliminated.
• Medicare prescription drug plans could see benefit changes in 2024 and 2025 designed to lower costs.
• Medicare managers could have the power to negotiate (some) drug prices starting in 2026. That could mean cost savings for retirees as well as potentially lower premiums.
• If you purchase insurance through an Affordable Care Act marketplace, you could qualify for an expanded premium tax credit through 2025 to help lower monthly costs.⁸

As always, we’ll have to wait for the legislation to mature before we can fully understand its total impact.

Overall, there’s a lot going on as we head into the fall and election season. Let’s not be surprised at more volatility or even a bigger selloff ahead.

 

1 – https://www.foxbusiness.com/economy/gas-prices-dip-below-4-gallon-heres-why-still-could-bad-news-biden

2 – https://www.thetrucker.com/trucking-news/the-nation/trucking-freight-costs-us-wholesale-inflation-see-declines-for-first-time-in-2-years

3 – https://www.nbcnews.com/business/economy/july-inflation-numbers-consumer-prices-rose-85-year-year-summer-inflat-rcna42393

4 – https://www.investors.com/news/consumer-spending-us-economy-sputters-winners-losers/

5 – https://www.marketwatch.com/story/why-blackrock-says-the-stock-markets-big-summer-rally-isnt-worth-chasing-11660579176

6 – https://www.cnbc.com/2022/08/15/goldman-sees-a-feasible-but-difficult-path-for-the-fed-to-defeat-inflation-without-a-recession.html

7 – https://www.morningstar.com/articles/1109390/the-inflation-reduction-acts-impact-on-retirees

8 – https://www.kiplinger.com/taxes/605057/inflation-reduction-act-premium-tax-credit

Markets rallied in relief on some better-than-expected data on Friday.¹ It was a bright spot in what has seemed like a relentless parade of bad news.

But the Dow, S&P 500, and Nasdaq still all closed out the week with losses.¹

Is this the bottom of the bear market?

Maybe. Or maybe we’re somewhere in the middle with the loop-the-loops.

Let’s be prepared for volatility to continue.

Folks tend to focus a lot on the numbers, but emotions and behaviors may matter even more.

Knowing how to stick with a strategy during the loops and curves and uphills and downhills is a HUGE part of being a successful investor.

Market bottoms don’t come with a signpost. There’s no one waving a flag saying, “the worst is over, it’s all uphill from here!”

The end of a bear market looks an awful lot like the middle, and we don’t know if it’s the bottom until after we’re already past it.

That’s why it’s so important to stick to a strategy and not let the euphoria of a rally or the fear of drops sway our decisions.

Investors who bail during the downturns and miss the ride back up tend to lose spectacularly.

Why? Because the best days and worst market days have historically clustered.²

We don’t know how long this bear market will last. We don’t know if a recession is coming.

We do know this: you can’t enjoy the upside of the rollercoaster if you get off at the bottom.

Bottom line: it’s nice to get a reprieve from the selling pressure, but let’s be (emotionally and financially) prepared for a lot more volatility ahead.

Markets bucked and sold off again.¹

Should we be worried?

Not necessarily. These things happen pretty regularly, especially when headlines are negative.

In fact, you might recall that we kicked off 2022 with a big drop.²

So, let’s talk about what’s behind the latest wild market ride.

(Scroll to the end if you want to skip right to the reassurance.)

What led to the selloff?

Primarily, economic worries.¹

Worries about new COVID-19 surges.

Worries about Ukraine.

Worries about the U.S. economy.

A report just came out showing the economy shrank by 1.4% in the first three months of 2022, surprising analysts who expected positive growth of 1.0%.³

Though a single quarter of negative growth isn’t a recession, it’s a sign that inflation, the Ukraine conflict, and the pandemic hangover are weighing on the economy.

Realistically, some form of a slowdown was probably inevitable, given the massive economic recovery of 2021.

And, the news isn’t all gloom. 1) This is a preliminary report, so we’ll see revisions later. 2) Economists still believe the economy has plenty of room to grow, particularly given the strength of the job market, so the economy could rebound. 3) Americans are continuing to spend.⁴

The economy is still strong, but it’s showing cracks. We’re watching closely.

You can see a theme: markets are being driven by worry and fear.

Is the selling done?

That’s impossible to say.

Could we see a bigger correction or bear market?

Absolutely. That’s very possible.

Corrections and pullbacks happen very frequently.

Here’s a chart that shows intra-year dips in the S&P 500 alongside annual performance. (You’ve probably seen this chart before.)

Take a look at the red circles to see the market drops each year.

The big takeaway? In 14 of the last 22 years, markets have dropped at least 10%.⁵

We’re dealing with a lot of uncertainty in 2022 and investors are feeling very cautious about the future.

However, that doesn’t mean that we should hit the panic button and exit our strategies.

Knee-jerk reactions to market turbulence can be VERY costly.

Questions? Concerns? Please hit “reply” and I’ll respond.

Thinking calm thoughts,
Dr. Chris Mullis, CFP®, CDFA®

P.S. A mental snack: A TED talk by psycho-economist Sheena Iyengar on how we make choices

P.P.S. Want to feel more grateful for what you have? Here’s another great TED talk on the topic by Benedictine monk David Steindl-Rast. If you watch it, hit “reply” and let me know what you think!

 

1 – https://www.cnbc.com/2022/04/25/stock-market-futures-open-to-close-news.html

2 – https://www.cnbc.com/2022/01/23/stock-market-futures-open-to-close-news.html

3 – https://www.cnbc.com/2022/04/28/us-q1-gdp-growth.html

4 – https://www.washingtonpost.com/business/2022/04/28/gdp-2022-q1-economy/

Archived PDF link

5 – https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf

Some perspective on the grim situation in Ukraine and what could happen in markets.

(Need a break from it? Scroll down to the P.S.)

The invasion of Ukraine is a serious and scary escalation in tensions between Russia, Europe, and the United States.

Before we dive in to what it could mean, let’s take a moment to think about the many folks who are suffering and dying as well as the ordinary Russians who will suffer from sanctions, instability, and economic damage.

We hope and pray that diplomacy can end this crisis for all our sakes.

Let’s talk about some possible implications for markets and our economy.

Given Ukraine’s critical pipelines and Western sanctions on Russia, the crisis may lead to higher energy prices, which will trickle down to higher pump and heating fuel costs.¹

Sustained price increases could hamper the Federal Reserve’s effort to control inflation, so we’re keeping an eye on that as well.

What could happen in markets?

Extreme volatility, as we’ve already experienced, is very likely. Another correction (or even a bear market) is definitely possible.

What does history teach us about market reactions to geopolitical shocks?

History shows that stocks usually recover quickly from geopolitical crises.

We’ll add a disclaimer that the future doesn’t perfectly match the past — but it often rhymes.

Let’s take a look at some examples from other invasions and wars.²

Here’s the key takeaway: short-term, markets usually react badly. However, a year later, markets have historically recovered.

Will they always? In every case? That’s impossible to say.

But, the study of 29 geopolitical events since WWII shows a general trend toward short-term losses in the first weeks and longer-term gains over months.²

A note: “geopolitical event” is a very antiseptic phrase for horrible things like bombings, wars, invasions, attacks, and really fails to encompass the full cost in human misery.

Let’s never forget the truth behind the numbers.

We can’t know or control what happens next. We can hope, pray, donate, and speak out.

And we can focus on what’s in our control: Ourselves, our actions and reactions, and our strategies for uncertain times.

Let’s hug the people we love extra tightly today and be very grateful for our blessings.

Be well,
Dr. Chris & the NorthStar Team

 

P.S. Tired of war and bad news? Need a break? We’ve got two TED talks for you:
1) A dive into research that shows how our brains might be wired for optimism
2) How to forge meaning from challenging moments.

P.P.S. Looking for ways to donate to Ukrainians? Here’s a roundup of some organizations doing good work.

 

1 – https://www.nytimes.com/2022/02/27/business/oil-prices-russia-ukraine.html
2 – https://www.reuters.com/markets/asia/live-markets-what-history-says-about-geopolitics-market-2022-02-18/