After reaching an all-time high on July 16th, the stock market has declined fairly quickly. The chart of the S&P 500 below clearly shows the reversal in the last two weeks.
The S&P 500 has dropped almost 9% from its peak and the Nasdaq has fallen almost 14% since its July peak. As of Monday, the S&P 500 was still up about 9% for the year.
It is important not to panic at times like this. These moves are quite normal for the stock market. Market drops of over 5% in a given year happen 94% of the time. Market drops of over 10% in a given year happen 64% of the time.
We would all like to know if this is a minor short-term correction or if this is the start of a bigger move to the downside. No one knows for sure but the good news is that you are already protected from the worst case if you are one of our Market Signals customers.
Let’s examine the factors behind this recent decline.
Recession Fears – The market did not like the negative surprises last week for the manufacturing index and the jobs report. We seem to have quickly moved from inflationary fears to recession fears. And we know that the stock market overreacts to both good news and bad news. The economy is clearly slowing down, and it has been for a while. This was to be expected with the Fed interest rate increases. The Fed appears to be poised to cut interest rates in the near term and the concern would be that the Fed is too late again. If economic and market data continue to be soft, expect the Fed to lower interest rates sooner rather than later.
Japan – The Japanese stock market has fallen by roughly 20% after the Japanese government raised interest rates. This may have contributed to the selling, but the American economy should be able to get past any short-term bumps in the much smaller Japanese economy.
As I have previously written, the odds of the Fed achieving a soft landing were very low to begin with. It has never been done before. A soft landing is still a possibility, however, albeit a small one.
Stay Disciplined My Friends,
Phil McAvoy
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
Through the end of last week, the bull market in stocks continued to reach all-time highs. And the underperforming Russell 2000 (small cap stocks) finally began to move higher – see the uptick for the grey line on the far right of the graph.
This week has seen a reversal with the S&P declining 1.4% for the week and the Nasdaq down 3.0% this week (as of Thursday afternoon). Nasdaq and S&P prices are getting overvalued, so a pullback is not too surprising after the big move higher over the last eight months.
It will be interesting to see if the falloff this week is just a minor pullback or if it is something bigger. The economic news has been mostly positive with inflation continuing to fall and expectations for a Fed rate cut growing. GDP is slowing down slightly but this has been expected following the Fed rate increases. If investors think the GDP slowdown might turn into a recession, stocks will continue to fall.
At this time, my guess is this week’s activity is a minor pullback, but we will keep a close eye on job reports and economic data.
Between November of last year and July 12th this year, the S&P 500 and the Nasdaq (top two lines) have moved sharply higher. Both the S&P 500 and the Nasdaq are at all-time highs. Notice how the Russell 2000 (bottom line) is still in a bear market – sitting about 12% below its previous high in November of 2021.
Our customers have posted huge gains since November of last year as we have been “all in” on stocks. The S&P 500 has gained 33% since November 1st. And our customers can be extremely confident knowing that our Market Signals system will move them to cash if the market declines significantly.
When you have downside protection, you can be comfortable putting 100% of your money in stocks and getting the big gains in bull markets. You can also sleep better at night.
Without an investing system like Market Signals, investors are forced to shift money to lower performing and safer assets before the bull market is over or be willing to get crushed in a bear market decline.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
Successful investors:
Are very disciplined
Have a rational investing process that they follow consistently
Base their strategy on facts and data
Are students of the markets
Understand the cycles and risks of the markets
Do not react to fads
Keep their emotions under control
Unsuccessful investors do the opposite.
And the biggest thing that hurts unsuccessful investors is emotional investing. Emotional investing is behind most of the major investing mistakes.
Overconfidence leads to problems for a lot of investors, particularly younger investors. Overconfident investors:
Read one article or one book that leads them to believe that they can outsmart the market
Are not as skeptical as they need to be
Are drawn to the newest investing fads
As a result, they end up getting burned.
Overconfidence starts to creep in after periods of high growth in the markets. At the time of this post, the Nasdaq had increased by 77% over the last twelve months with most of those gains driven by huge increases in the Magnificent Seven stocks. Nvidia grew by 176% over the same time period. People who invested in the high growth stocks are now thinking that they are investing geniuses.
Experience in the markets will humble you. Just when you think you have it all figured out, the market will punish you. Hubris will cloud your judgment. Overconfidence will make you sloppy.
Greed is another emotion that leads to costly investing mistakes. Greed has many of the same impacts as overconfidence.
Greed clouds your judgment.
Greed leads to chasing sketchy opportunities and taking on too much risk
Greed causes people to follow the crowd and to get into opportunities when it is too late
Greed causes people to act too quickly and without all the facts
Greed causes investors to focus too much on the short-term and “get-rich-quick” ideas
At the present moment, people who missed out on the big moves in Nvidia and the other Magnificent Seven stocks are often envious of the people who made a lot of money in those stocks. They tend to buy at the top of markets and suffer big losses when the market turns.
The technology growth stocks typically climb the highest in bull markets but they drop more in bear markets.
I am not saying that people should not invest in growth stocks. I am saying that you should not buy these stocks based on an emotional reaction to a recent trend. Investing in stocks like today's Magnificent Seven should be part of a long-term strategy by investors who are well aware of the stock market cycles.
The other strong investing emotion that affects more people than the emotions of greed and overconfidence is fear.
Fear is one of the strongest human emotions that impacts every area of our life. Fear is part of our survival mechanism and is designed to keep us safe by avoiding danger.
Investing fear leads people to safety. Investing fear causes people to put too much money in safer, interest-bearing assets that provide low investment returns. Fear causes many people to avoid the stock market altogether.
Fearful investors can limit their losses in market downturns but it comes at a steep cost - not having enough money in retirement due to poor investment returns.
Fear also causes people to sell when markets bottom out. Many investors throw in the towel after they have suffered too much in bear markets. By doing so, they make those losses permanent and miss out on the inevitable bull market recovery that follows.
I created my Market Signals Investment System to counteract our natural tendencies to invest emotionally. It is a disciplined and quantitative investing approach that is a “get-rich-slow” system. Market Signals takes advantage of the highly volatile cycles of the market to make lots of money in good times and to avoid losses in bad times.
If you want to be a successful investor:
Stay humble
Stay skeptical and wary
Avoid greed
Don’t let fear cloud your judgment
Be deliberate
Seek out data to prove or disprove investing strategies
Keep your emotions under control
Stick with proven and disciplined investing approaches and methods
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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