Market Update for May 26, 2022

“Recession” and “Bear Market.”  Two scary terms in the annals of investing.  Let’s define them and drill down on what they actually mean.  A recession is commonly defined as two-consecutive quarters of negative GDP growth.  A bear market is commonly defined as a 20% correction from peak-to-trough before recovery back to the previous highs, signaling the end of the bear market.  We just technically entered a bear market last week and according to data from Bespoke, stocks typically fall by another 12% and it takes the index an average of 95 days to hit the end of a bear market.

That article points out that in more than half of the 14 bear markets since 1945, the S&P 500 hit a low point within two months of initially falling below the 20% threshold—and forward returns were largely positive, with the index rising an average of 7% and nearly 18%, respectively, over 6- and 12-month periods.

We may not have seen the bottom of this recent downtick, though I have to say recent action has indicated to me we are trying to find a near-term bottom.  Check out this chart for some historical comparisons.

The first and second years (and this year is the second year) of a presidential cycle have been historically weaker than the third year of the cycle.  But the one-year returns following a midterm election have been historically strong.

Exciting news for some of you, if well-established historical trends hold the Republicans are likely to take seat-share back from the Democrats in both the Senate and the House this fall.

But, markets have historically done far better under Democratic presidents.

For all of you with 401(k) accounts and monies I don’t manage, here are a few areas of the market I would avoid: emerging markets, small-cap stocks, technology stocks.  We are late in the economic cycle and those are not areas of the market that typically do well “now.”  Areas of the market I am neutral on: oil and gas stocks- which have been strong lately, but I fear a reversal here- utilities, real estate, corporate and government bonds, and developed international stocks.  Areas of the market I do like:  large-cap value stocks, mid-cap value stocks, healthcare, and high-yield bonds.

CD’s and fixed annuity rates from insurance companies are higher than they were months ago and should continue to rise.