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Hear from Chief Investment Officer Jesse Mackey in this week's Multi-Method Investing® Market Perspective.
I’m Jesse Mackey, CIO of 4Thought Financial Group, and this is 4Thought’s Multi-Method Investing® Market Perspective as of December 13th, 2022.
On October 13th the S&P 500 (Price Return) Index reached the current maximum intraday draw-down of 27.5% from its January 4th peak price. After a partial recovery in the time since then, the index sat 17.18% below the record as of the close of business yesterday. The initial indication of a Bear market on May 20th (based on the technical intraday definition of a 20%+ decline), has very significant implications for portfolio management strategy.
The history of the S&P 500 index since 1950 reveals that once Bear markets have been identified (in which a 20%+ decline from a record peak has occurred), they have continued for an average of an additional 4.61 months and have experienced an average additional cumulative loss of 16.56% until the trough is reached (for a total cumulative drawdown of 33.2%). However, six out of thirteen instances of a Bear turned around within 1 month after it was indicated (some as early as the same day), while all others lasted longer (up to a maximum of 1.63 years). As of the date of the deepest trough measured so far (on October 13th), 4.87 months had elapsed since Bear market indication, and 6.9 months have elapsed as of today (both measures already longer than average). For long term investors that can afford to wait until a recovering upturn in the market cycle, such data calls for aggressive deployment of cash and cash equivalents into stocks (and bonds in this case). Long term investors should now consider an immediate deployment of 100% of any idle cash (not needed for short term liquidity or expected upcoming spending). There is no longer any need to wait for further declines, or to use a dollar cost averaging program for idle cash (as was the case in the first 5 months after bear indication). This should be discussed with your advisor to confirm appropriateness for your situation before taking action.
Based on analysis of the complete historical market type data set using our Multi-Method Adaptive algorithmic process, we are now allowing overweight allocations to Strategic Asset Allocation, and underweights to Liability-Driven Investing, Opportunistic Investing and Selective/Concentrated Investing.
From a probabilistic analysis perspective, valuations tell a story that's positive for most stock types, but even more favorable for some bond types. On this basis, most stock types now range from slightly undervalued to significantly undervalued. By comparison, most bond types are now measured as significantly undervalued. Investment grade corporate bonds now reflect the most attractive pricing relative to the alternatives, while international developed markets stocks are the least attractive. Emerging markets stocks are the worst performing publicly traded broad asset type so far this year, while US Short Term Bonds have been the best (despite their own negative returns).
Against this backdrop the outlook for stocks is now highly positive in the intermediate term based on the overall aggregate of our historical market-type data analysis and quantitative probabilistic analysis.
I hope this was helpful. If you have questions or you’d like to discuss what this means for your particular situation, please contact 4Thought at 516-300-1617 or at firstname.lastname@example.org – and don’t forget to subscribe to our blog feed and our YouTube channel. Thanks for watching, and see you next time.