It's official. In June, Fed Chairman Jerome Powell stated that a recession is possible, and every financial journalist talks about it every day now. Inflation affects returns in bonds, stocks, gold, real estate, and cash at different velocity rates. So, I will not waste your time writing an article discussing something you already know. I want to discuss my opinion of when I think this bear market will end, the ending signals, and how KW Wealth explores investment strategies in the bear market.
I believe the relationship between the bear market duration and the effectiveness of the government's fiscal policy is vital. According to Vanguard's June Market Perspective, more extended bear markets don't necessarily mean deeper declines. For instance, the S&P 500 dropped 34% during the 33-day selloff in 2020, but it took nearly two years to decline 27% from 1980 to 1982. As you can see, every recession has a different duration.
Whether this current bear market will carry to 2023 will depend on the convincingness of the Biden administration and the Federal money supply policy to combat inflation. Even if mega-cap companies come out with blockbuster earnings this quarter or next quarter, the GDP forecast expectation will continue to be lower for the rest of the year. Then, the downward bias will not cool down as weaker consumer confidence pertains.
Reference: Cboe Global Markets, Data range: Dec 31st, 2021 to May 20, 2022.
Now, let's review the past recession cycles and how long it takes to end.
According to the National Bureau of Economic Research, below are the duration of the past recession:
· July 1981 – November 1982: 15 months
· July 1990 – March 1991: 8 months
· March 2001 – November 2001: 8 months
· December 2007 – June 2009: 18 months
· February 2020–April 2020: 2 months
As you can see from above, a recession can last three consecutive quarters during a U-shaped slump. Obviously, the longer the downturn drags on, the longer it will take for the new highs to appear. Nevertheless, the market tends to climb to new highs after these recession cycles. I presume the current bear market is not a short one like 2020 because you have the Fed, government spending, Ukraine, etc. These are complicated issues.
Furthermore, this current bear cycle was not activated by low employment like in 2000, a financial crisis like 2008, or a pandemic like 2020. Instead, I believe it is very similar to the 1990 recession. The 1990 recession was triggered by: 1. Ineffective execution of the Federal Reserve's monetary policy in response to inflation concerns; 2. The loss of consumer and business confidence due to the oil price hike from the Iraqi invasion of Kuwait.
Before the recession in 1990, the United States of America enjoyed robust job growth and a rising unemployment rate. Ultimately, the economy returned to its previous level eight months after energy prices dropped. While past performance has no guarantee of a future result, and no two recessions are entirely the same, I believe the current bear pattern is comparable to the 1990 recession.
Three signs to watch for recovery:
My April and May client-only newsletter mentioned that crude oil prices directly correlate with the current inflationary environment. Lower energy prices will be an early signal for the current bear market to end. Another sign of ending this bear market is specified by monitoring the improvement of real income or buying power. Real income means real purchasing power, defined as wages adjusted after inflation. Thirdly, government policies on balancing spending on quantitative easing (stimulus) and corporate taxes (billionaire tax) are also vital to watch whether businesses become reluctant to hire and expand the business.
What are the strategies to manage investment during a bear market?
Don't let emotions and anxiety cloud your visions. Year to date, most self-directed investors reaching out to KW Wealth have lost more than market indices due to poor risk management or inflexible rebalancing plans. These investors had tons of buyer remorse and urgency to control the downward trend of their stock selections. Buyer remorse is not a strategy to combat the bear market. Pay to get help from a competent money manager of your choice. Do not try to save a 1% annual fee by watching your portfolio decrease 5% to 10% per month while suffering sleep loss. Suppose you are Warren Buffet, Bill Gates, or Elon Musk. They don't do everything alone; they hire trustworthy and competent individuals to help protect, preserve, and grow their business.
Like Warren Buffet said, "Only when the tide goes out do you discover who's been swimming naked."
KW Wealth has a straightforward portfolio performance appraisal and forward-looking risk management plan. We are in the position to execute the strategy to buy great companies with excellent leadership at a very inexpensive price when we believe the market selloff overshoots a good stock. Presently, forward price-to-earnings (P/E) metrics have come down to much more reasonable levels. For instance, Veritiv is 6.6, Archer-Daniel is 12, and Bank of America is 9. Additionally, we have sought to benefit from the current mortgage rate hike and picked up short-term mortgage bonds paying between 6% to 8%.
For those not in the position to live off the income generated by their retirement accounts and not in a high tax bracket, this year is an opportunity to consider paying the tax for ROTH conversion. When the market was high, the tax bill to transfer from a traditional IRA to a Roth was expensive. So a tax concern is less of a holdup nowadays since the market is down. Furthermore, a client can reduce the required minimum distribution by paying the tax for ROTH conversions. Moreover, Roth distributions won't impact the tax implication for social security and medicare surcharges. As a disclosure, a client should have a thorough time value and tax analysis done and consult with a CPA of your choice regarding your circumstances before executing a ROTH conversion.
In conclusion, a recession equals opportunities if you have a level head and a system to shop and invest for the long term. We will continue to monitor this bear market closely and proactively look out for protective strategies. I am keen on executing a defensive and offensive investment plan for the rest of 2022.
Since 1998, I have served as a useful source to those seeking financial educations, guidance for life-changing events, or investment advice. I finally decided to own that role and be intentional about it. I started writing about my thoughts, my market insight, and curious wonderings about our world. I founded KW WEALTH MANAGEMENT with a mission to give others a taste of what goes on in my mind, and I have been at it ever since.
Kimmy is not registered with any political party. Any views or opinions represented in this blog belong solely to the blog owner and do not represent those of people, institutions, or organizations that the owner may or may not be associated with within a professional or personal capacity. Any views or opinions are not intended to malign any religion, ethical group, club, organization, company, or individual.
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