MARKET UPDATE 2022

With the difficult year of 2022 just ended, let’s look at how the major market indices performed. As of the market close on Friday December 30th, the S&P 500 is down 19.5% from its previous peak at the start of the year. The Nasdaq and the Russell 2000 are down 27.9% and 34.1%% respectively. The Vanguard Total Bond Index (BND) is down 15% for the year. Bonds did not help your portfolio this year. The S&P hit its low of the year (drawdown) on October 12th - down 25%. Also in mid-October, the Nasdaq reached its low (drawdown) of -34.8%.

Here is a comparison of the three indices in 2022. The patterns are very similar, but the S&P 500 has fared much better than the Nasdaq or the Russell 2000. In the graph, you can see how the Nasdaq has lagged the other indices in the last two months. The market continues to punish technology stocks this year.

Throughout 2022, we have been comparing this bear market with the bear market of the 1970’s. The graphs line up well as you can see below, and the seventies were the last period where we experienced high rates of inflation. The 1970’s market was only halfway through its decline at this point and continued falling for another year. It bottomed out with a price drop of 45%. This year’s market is still following the slow and steady decline we observed in the early 1970’s.

Let’s look at another view of the S&P this year to see what the technical analysts are seeing. Charts like the one below shows what are called price support (lower line) and price resistance (upper line) levels. You can see that the trend lines are still heading in a downward direction despite the recent positive move. The S&P is approaching a price resistance level and if it breaks through this upper level, that would be a positive sign. Analysts would become bullish if the S&P index continues its current climb and gets above 4,300.

We are now just about twelve months from the pre-crash peak for the S&P and about fourteen months from the peaks of the Nasdaq and the Russell 2000. The average length of a bear market decline is eleven months, so it is possible that we are in the late stages of this crash. But we just saw that the 1970’s bear market decline lasted two years.

ARE WE OVER-VALUED OR UNDER-VALUED?

Another tool that we use and that other hedge funds use to assess the current stock market is a market value indicator. With all the ups and downs of the stock market, it can be easy to get confused as to whether the market is over-valued or under-valued at any point in time. Many people use a Price to Earnings ratio to make their value assessments. We don’t like this approach because it can be very difficult to know what the “right” P-E ratio should be. We prefer to measure current prices to a consistent “fair value” indicator for the overall market (the S&P 500). Our fair market value indicator is also tied to corporate earnings growth, but it produces an expected value of the market at any point in time versus a P-E ratio.

Here is how the market has compared to a “fair value” over the last five years. As of 12/30/22, our indicator suggests that the stock market was under-valued by 11%. In the third quarter of 2021, our system thought that the market was over-valued by 17%. It is not too surprising, therefore, that the market pulled back in 2022. At the low point of the 2020 Covid crash, we thought the market was undervalued by 17%. So, in an eighteen-month time frame (March 2020 to October 2021), the market went from being under-valued by 17% to being over-valued by 17%. The last two years have been extremely volatile, and this kind of volatility can make even experienced investors uneasy. Our Beyond Buy & Hold system, however, benefits from these wild price swings in short periods of time.

You can take some comfort in knowing that the market is under-valued by 11% at the end of 2022, but we do not recommend trading based on this one indicator alone. We only use the indicator as a guide and as a small part of our trading algorithms. This indicator can be very helpful when you have a unique situation where you plan on investing a lump sum into the stock market or you have the need to execute a large sale of stock.

The reality is that no one knows if the worst is over or not for the stock market. The direction of inflation and the economy and corporate profits will likely dictate when we begin the inevitable rebound. Because of the uncertainty, it is important to follow a disciplined approach to stock market investing. Our approach to investing relies only on quantitative measures of actual price trends. We make no predictions about which way the market will head in the future. Stay disciplined, my friends.

Happy investing,

Phil

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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.