This past Friday, we saw the major indexes go up substantially after having just unrelenting selling for weeks. It was a nice distraction for a day as we just completed 6 weeks in a row of declines in the S&P 500 and that does not happen very often. This was the 15th time since 1950 that we have seen a 6 week decline in the S&P 500. However, the magnitude of this selloff is really unprecedented considering the state of the economy and corporate profits.
I am looking at a chart of selloffs that lasted 6 or more weeks and I see the 2011 (Greek Crisis) 2008 (financial crisis) & 2000, 2001, 2002 (Tech bust period combined with a recession, 9-11 & the Enron/WorldCom era). Those were bad periods, particularly 2008 and 2000-2002, but this past quarter's numbers must be just as horrible right?
Coming into Q1, wall street consensus earnings growth on the S&P 500 was up 4.70% and with about 40 companies left to report we are seeing earnings growth of around 10%. 78% of companies beat their estimates. Revenue for corporate America came in even higher with 13% growth. See the latest LPL Market Commentary for more information.
Right now this selloff is based on speculation that the FOMC is going to put us into a recession and inflation will remain out of control. Please read my prior posts regarding why I disagree with this assessment, but I prefer to look at long term odds and not short term odds. The longer the time frame, the greater your chance of having positive returns in an S&P 500 index fund. How much more so if you have a balanced portfolio among different market caps, bonds, foreign stocks & alternatives while rebalancing every 12-18 months?
There are threats to the economy and consumer discretionary spending in particular, but the next 3 months will be critical in determining where the markets go from here. What the picture looks like today can change very rapidly tomorrow. For instance, I am a big hockey fan and I was watching the New York Rangers last week go down 3 games to 1 against the Penguins. Facing elimination the Rangers came out slow and kind of looked like they wanted to just get off the ice and accept defeat. After being down 2-0 all of a sudden they picked up speed and the fight returned. It was like that remote control car you had when you were a kid that almost stopped working because the batteries were too low, but once you put fresh batteries in, the toy was moving fast again! Momentum shifted and the Rangers ended up winning that game. The odds makers said that they had no chance of beating the Penguins 3 games in a row, but they did just that in a game 7 overtime win last night.
We need fresh batteries, we need a big hit or a goal to change the momentum and the attitudes on wall street. What does that goal or hit look like? A positive geopolitical event instead of a bad one or an end of lockdowns in China or a steady decline of inflation numbers three months in a row.
The inflation numbers are horrible, consumer discretionary spending is down and future profits and economic growth are being called into question. If the inflation numbers do not begin to roll over by August in spite of the FOMC raising rates, then I will join the camp that it looks pretty bad in the short run. However much like hockey, momentum in the markets and the economy can change very quickly. Even if things do get worse before they get better, do you really think you can get out and know exactly when to get back in? I wish you well if you do but as for me, I will stick with my investment plan and look to take advantage of the current weakness by adding money to and rebalancing portfolios where appropriate.