I hope this finds you and your family doing well!
The S&P 500 index represents the top 500 publicly traded companies in the United States. Over the last few months, the media has bombarded us with S&P 500 “correction” and “bear market” headlines. You may be asking, “What is a correction and a bear market?”. A correction is a 10% decline from a previous record high and a bear market is a 20% decline from a previous record high. On Monday, June 13th, the S&P 500 officially closed in bear market territory. The S&P 500’s previous closing high was on January 3, 2022.
The main reasons for the decline are: interest rates increases from the Federal Reserve, increased inflation and supply chain issues/shortages from COVID and Russia’s war in Ukraine. This combination brings uncertainty about the future, and the financial markets prefer certainty.
As we have talked in-depth over the last few years, when interest rates go up, bond prices go down. They are inversely related. The trajectory of interest rates has been going down for the last 40+ years. The lowest rate ever recorded on the 10 year bond was on March 8, 2020 at .31%. This morning, the 10 year bond stands around 3.40%. Usually the next move in the financial markets is in the opposite direction with the same velocity. The future will be here when it gets here, but we could experience rising rates and lower bond prices for an extended period of time. The U.S. Aggregate Bond Index is down 11.70% for the year as of yesterday’s close of business. The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index used by bond traders and the managers of bond funds.
The Federal Reserve has made it clear that they are going to do what is necessary to tame inflation. For starters, it means they will continue to raise interest rates and remove excess liquidity from the financial system. Currently, both are being done aggressively. The federal funds rate was increased by .75% yesterday, the biggest increase since 1994. They have now raised rates by 1.50% so far in 2022. The annualized growth of our country’s money supply has pulled back to 1.3% from its all-time high of 26.9% in February of 2021.1 Both are good signs to lower inflation.
The Federal Reserve’s activities take time to work themselves into the economy. Patience is a virtue. While this is happening behind the scenes, it is important for us to continue to exert influence over what we can with our personal financial planning. While our savings and investments grow and compound, what we can financially influence or control has a larger impact than what we cannot. Practices like having a financial plan and sticking to it, keeping our arms around our spending, beefing up our Emergency Fund, staying out of or paying down debt are great places to start. Small incremental moves add up over time and have the ability to exponentially change our financial position for the better.
As far as our investments go, we need to stay the course unless something materially has changed with our financial position. If you have excess cash reserves, start investing. Did you know that stocks and stock funds are one of the only items that people will not buy when they’re on sale? Consider this a sale as it’s only the 12th time we’ve experienced a bear market since World War II. Could the markets go lower? Absolutely. Should we try to pick a bottom? No. Ultimately, it’s time in the market that counts, not timing the market.
I encourage you to visit our Client Center at eastwoodwealth.com to review our Retirement Rules of the Road, Navigating the Ups and Downs of Investment Management, our 2021 Annual Letter and our article on Buying A Home. Stay up-to-date by visiting our blog, The Pineapple Post.
Follow us on our social media outlets as we continuously release new information, almost every day. Facebook seems to be the most frequently used platform by Clients. Simply search Eastwood Wealth and click the thumbs up icon for our communications to start showing up in your feed.
Please feel free to reach out any time you have questions. We can connect via phone, Zoom or meet in person. If you have a loved one or friend that needs someone to listen and talk with them about their financial planning and investment management, please share my contact information.
Thank you for being my Client, it is a privilege to serve you and your family.
Have a great rest of your week!
Tim Evans, CFP® CLTC
The opinions voiced in this material do not necessarily reflect the views of LPL Financial are for general information only. All performance referenced is historical and is no guarantee of future results. All Investing involves risk including the potential loss of principal. No investment strategy including buy and hold and diversification can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary and therefore this information should only be relied upon when coordinated with individual professional advice.
All indices are unmanaged and may not be invested into directly.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.
1 May 25, 2022, scottgrannis.blogspot.com
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