Will Uncertainty Attract a Bear Market?

 
 

Stock prices are down. Gas and Food prices are up. There’s a war in eastern Europe. The FED is raising rates. Another pandemic outbreak locks down much of China.

On all this bad news is it any wonder that portfolio values are down?

But wait a minute. We get bad news all the time. The media thrives on bad news. What turns this set of signals into a market conflagration?

There is one word that the markets, and traders specifically, don’t like.

Uncertainty.

Uncertainty can create market pullbacks and corrections. Think about baby bear, momma bear, and papa bear. Pullbacks are the little ones. Normally, we see the baby bears, or pullbacks of 5 to 10%, on average, about three times per year. They’re rarely seen as threating.

But when mama bear arrives, we notice and get more careful. She’s the correction of 10% to 20% that gets people asking questions. She shows up on average about once a year, too.

During all of 2021, no one saw any of the three bears, not even a bear cub. It was up, up, and more up in the markets, achieving 70 all time highs on the S&P 500 index[ The S&P 500 is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results.]. It achieved another all-time-high on January 3, 2022.

Since then, we’ve seen both the baby bear and its mother. Stock prices are down at least 10% on all the major indexes, hitting technology shares particularly hard. Mama bear doesn’t usually hang around very long, maybe several months, until the markets figure out the uncertainties causing the disruptions.

If uncertainty persists, or worsens, and mama bear hangs around too long, papa bear might come looking. He’s not so nice and can stick around for years. Bear markets are commonly defined as a decline of more than 20%.

But he doesn’t like the hustle and bustle of a roaring economy. We’ve seen him three times this century, and every time he was accompanied by recession.

Are we on the precipice of a bear market, wherein everything spirals downward to an almost irretrievable depth?

For all the uncertainty surrounding the future ramifications of wars and pestilence, we have some level of certainty about important things that matter.

The most important of those things is the strength of the economy. Americans who want to work are finding jobs, and in many cases finding better jobs. Did you hear the term “the great resignation?” Unemployment as a percentage of the workforce is nearing its pre-pandemic lows.

Look at what the Federal Reserve (aka the FED) is doing this year for another indicator of the resiliency of the economy. The FED is raising interest rates and beginning to reverse the quantitative easing begun during the great recession of 2008. You need to know that the FED is equally concerned about jobs and inflation.

Is there a risk that the FED blows it and creates the next recession? Of course, that’s a possibility, but in my opinion, that’s a fairly low risk, because they’ve learned from their predecessors’ actions how important it is to telegraph their expected moves.

What about the great reshuffling of supply lines caused by the war in Ukraine? The embargos likely will disrupt the flow of energy from Russia, most notably into Western Europe. Somewhere in the world of energy producing companies, I’m sure that there is a board of directors salivating over the prospects of supplying energy to the planet’s fifth largest economy.

And thanks to the impact that the pandemic wrought on supply chains, we’re seeing the beginnings of another movement, called “on-shoring,” or building domestic manufacturing capacity to mitigate the critical failures of unbridled globalization. So, companies are beginning to diversify their supply lines.

Investors should consider maintaining a diversified portfolio[ There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not protect against market risk.], which can help reduce risk, especially during times like these when businesses are forced to find new ways to produce their profits.

Investors moving money either into or out of a diversified portfolio must be aware of the relative strengths and weaknesses of the different asset classes in deciding where to move funds. Missteps during periods of market volatility, like now, can create lasting problems, while thoughtful actions can improve long-run performance[ The opinions voiced in the material are for general information only and are not intended to provide specific advice or recommendations. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. ].

At Enduring Wealth Advisors, we’re prepared for difficult times. We’ve got strategies for our clients in both the accumulation and the distribution phases of life. Give us a call to learn more.

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