After an astounding seven consecutive weeks of weekly declines - the longest such streak in over 20 years - the U.S. equity markets finally had a long overdue rally to close out the month of May. The S&P 500 managed to eke out a 0.26% gain on the month after being down nearly 8%, while the Nasdaq Composite paired its losses to just under 2%. While the S&P has narrowly avoided bear market territory (defined as a pullback of greater than 20%), the Nasdaq is still there on a year-to-date basis.
The preeminent risk of a recession lingers as the Fed continues on its quest to cool down inflation, although it hinted last month that it may be more flexible than previously thought in terms of raising interest rates to avoid inducing a recession. Inflation slowed in April from March, and consumer demand and spending has remained resilient in the face of higher prices. In short, it appears that much of the economic outcome of the next six months will depend on how aggressively the Fed feels it needs to act in order to combat inflation.
Our S&P 500 monthly momentum indicators (measuring the average change in price between the current month and each of the previous six and twelve months, respectively) are negative, as expected, for the second consecutive month going into June. While all bear markets are different, one main point of consistency is that they typically do not fully unfold quickly. With the glaring exception of the 2020 pandemic induced (but short-lived) bear market, they usually tend to play out over a longer timeframe and include substantial rallies before ultimately bottoming. As the chart below details, the 2007-2008 bear market did not move below -20% until nearly 200 days after the market peak.
Source: Morningstar Direct, Edward Jones calculations. S&P 500 indexed to 100 at peaks. Past performance does not guarantee future results. Market indexes are unmanaged and cannot be invested into directly.
In analysis of the monthly momentum indicators, we look for at least 4 consecutive months of negative and declining momentum before moving completely out of equities. This has tended to work well historically because it gives the market time to confirm or infirm a longer-term trend of weakness.
In this case, the average momentum indicator was positive at the end of March. April saw the index decline by nearly 10%, and while we are still negative as of the end of May, momentum did not decline over the previous month. So, while we have reduced the risk in our portfolios, history suggests that it may be in our best interest to continue to hold some portion in equities due to the relatively short time that has elapsed in this current market downturn.
S&P 500 Close
Rather than hold a short-term fixed income position, we feel it is better at this time to hold the conservative portion of our portfolios in cash due to the pace at which interest rates have risen.
In summary, we are:
- 50% equities, 50% cash
Objectives: For our core portfolios, our objective is growth with a reasonable level of risk. Our portfolios are actively managed, and we adjust our exposure to the stock market based on technical and economic factors. When appropriate, we may reduce or eliminate our stock market positions in order to preserve capital.
As always, I appreciate the opportunity to serve as your advisor and partner with you in reaching your financial goals. Wishing you and yours well!
This column expresses our views and opinions as of the date of publishing. Those views can change at a moment's notice when the market changes.
Disclosure: Choice Wealth Management, LLC is a registered investment advisory firm. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.