Time In vs. Timing Of: 2nd Quarter Market Update

By Brent McQuiston CFP® on May 9, 2023

There is no shortage of competing forces in the markets these days.  The Bulls and Bears are trading punches and the Tug-a-War continues.  The market recovery since the lows in September of 2022 has been bumpy but still meaningful. 

• S&P 500 All Time High, January 3^rd, 2022, at 4,796.56
• S&P 500 Bear Market Low, September 30^th, 2022, at 3,585.62 (-25.25% from high)
• S&P 500 As of month end April 28th, 2023, 4,169.48 (recovery from low +16.28%)

Getting a bit nerdy on analysis I went back over the last 143 trading days between the market low point on Sept 30^th, 2022, and the end of April 2023.  What I found was the S&P 500 in that period had 74 down days and 69 up days.  Despite more down days than up days the S&P 500 still managed a cumulative gain of 16.28% since the market low.  This means we had some pretty good up days that you would not want to miss.  For example, on November 10^th, 2022, the S&P jumped a whopping 5.54% in a single day.  The good days, although fewer, were more impactful than the seemingly endless down days. 

The old saying that investing success is more about “TIME IN” the market vs. “TIMING OF” the market seems to ring true.   If you missed the 10 best trading days each year over the last 3 decades your investment returns would be cut in half.   I bring this up as human nature wants the best of both worlds.  Please just give me the up days with none of those pesky down days!  When we figure that out, we’ll be sure to let you in on the secret. 

At WealthTrust Advisors, we like to advocate a strong investment philosophy within a disciplined approach to help our clients stick to their plan, through thick and thin.  Instead of trying to time the market, we help investors focus on quality, portfolio diversification, and aligning investments to long term goals.  This is an effort to catch those very important up days that are hard to predict.  Over time, this helps build better returns.  In addition, our investment committee continuously monitors trends in the economy and markets which helps us fine tune our recommended investment positioning. 

Investor Tips:

• Know your tolerance for investment loss.  Your investment allocation across stocks, bonds, cash, and alternatives should be aligned to your risk tolerance.  The unique balance between upside potential and downside risk is a great conversation to have with your investment advisor.  If you are comfortable with your investment strategy you are much more likely to stick to it!
• Diversification is key but not always simple.  It is very easy to unknowingly be overweighted in popular stocks within your investment strategy.  Having the right amounts in selected areas across various investments takes a fair amount of analysis.  If done well, your portfolio will have built in resiliency.  Our investment committee puts in the time and research, so you don’t have to.
• Invest with a purpose for your long-term financial goals.  This ties well into your financial plan.  Focusing on long-term planning goals can help you stay on track and be less worried about the day-to-day movements of the markets.  Again, time in the market matters. 

As we navigate the challenges in today’s economy and markets, we will continue to adapt.  As stated in our Q1 commentary, the Fed tightening cycle is closer to the end than the beginning.  Fed Chair Jerome Powell said these words exactly in his press release on May 3^rd.   At WealthTrust Advisors, we believe we are very close, if not at the end of, the tightening cycle.  This may give the markets some breathing room, but we are not out of the woods from an economic slowdown.  Even if the Fed holds off on future rate increases the impact of the tightening cycle will continue to build in the months ahead.  On top of that, lending is getting tighter which could lead to a credit crunch, particularly in commercial real estate.  Lastly, we have an ongoing confidence issue from regional bank customers where customers have been pulling deposits.  This has been done out of fear that deposit outflows could collapse at-risk banks, i.e., the classic bank run.  Fear has been creating a self-fulling prophecy leading to potential harm to otherwise well-capitalized banks.  All banks, big and small, ultimately depend on the collective trust and faith of their depositors.  Restoring this faith and trust is key to stabilizing the regional banks.  Hopefully, actions by the leaders in the Fed can bring calm so that important regional banks can continue normal operations.    

As we have mentioned we are not out of the woods of a potential recession.  As of May 9^th, short-term rates in the bond market are near cycle highs with 3-month Treasury Bills yielding 5.2%.  Long rates, on the other hand, are much lower.  For example, the 10-year Treasury Bond is only yielding 3.5%.  The current yield curve is strongly inverted which means the bond market is telling us a recession is likely.  An inverted yield curve is when short term rates are higher than longer rates.  In a normal yield curve, the opposite is true. 

How the stock market will respond should we have a recession this year will be somewhat unknown and possibly surprising, but not necessarily in a bad way.  Typically, recessions are confirmed when we have two quarters in a row of negative GDP.  This happened in 2022 when GDP logged two quarters of negative growth.  This was followed by a steep 25% correction in the S&P 500; however, it is very important to remember that no recession was declared in 2022 by the NBER (National Bureau of Economic Research).  Keep in mind the NBER looks at GDP as well as multiple other data points for their analysis.  This includes employment data which has been very strong and not flashing any shade of red. 

Could it be that the markets priced in a recession in 2022 and started the recovery phase ahead of an official recession announcement, which may or may not happen this year?  History suggests markets begin their recover phase usually somewhere in the middle of a recession, i.e., markets lead in and lead out.  If 2022 was a recession in the eyes of the market it would make sense.  Just an interesting thought that we kick around in our investment committees.  This may indicate that a continued market recovery could happen despite whether we have a formal recession announcement by the NBER.  So far, 1^st quarter earnings reports have been surprisingly higher than expected, which is good to see.   Instead of getting too caught up in recession talk we will focus on our discipline, client specific goals, and client risk tolerance.

In summary, now is the time to have patience as the economy and markets find their way over the next few months.  If the last thirty years of history have taught us anything it is “Time In” the markets matter.  Sticking to your core discipline, while having a clear understanding of your risk tolerance and goals helps build purpose as you go after long term success.   

Should you wish to discuss the markets and strategies in more detail, please give us a call.