Review
The second quarter ended with the worst first half of the year performance since 1970 with the S&P 500 down over 20%. Continuing concerns over inflation, Federal Reserve rate hikes and the war in Ukraine increased the probability of a recession.
As the investment community searches for signs the market has bottomed, it is good to note historical similarities. There have been 12 bear markets (20% or more decline in the S&P 500) since World War II. The average length of those has been 10 months, with an average decline of around 30%. Within half of those bear markets, the bottom was put in within two months of piercing the 20% decline and the average gain for the 6 month and 12 month periods after was 7% and 18%, respectively. So, from a historical perspective, large declines are typically short-lived, and recoveries tend to be just as sharp.
Outlook
When sentiment and data are so one-sided, it tends to lead to both over-bought or over-sold conditions. We believe we are in such circumstances as investor negativity and economic data are so negative that over-negativity has been priced into the markets. When this happens, any sign of positivity can send the market rocketing in the other direction. It is our opinion that if it hasn’t already, the bottom will be put in within the next few weeks. Thus, we are looking to start utilizing cash on the sidelines to begin to get portfolios fully invested over the coming weeks.
Equities
We will be looking to increase exposure to equities in the coming weeks as we believe most negative news has been priced into the markets. Corporate earnings announcements in the next few weeks may provide an opportunity to gradually add to equity positions with the goal of getting to a fully allocated weighting during the quarter.
Fixed Income
We are still underweight fixed income. With interest rates rising, fixed income will struggle. VCM portfolios are positioned for an inflationary environment. We are currently exposed to shorter duration fixed income as well as less interest rate sensitive income areas.
Alternatives
Our commodities position was an outperformer over the last few quarters as it is historically one of the best performing sectors in an inflationary environment. We continue maintain a broad-based commodity position in client portfolios but will look to reduce this position once inflation has peaked.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.
Jason M. Vavra, CPA, PFS
Email: jvavra@vcm-wealth.com Website: www.vcm-wealth.com Twitter: @VavCap
Disclaimer
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.
