The S&P 500 Sinks Well into Bear Market Territory: Market Commentary from Cabana’s CEO – June 15, 2022

2 weeks ago

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Last week we provided what I believe is some very important information on the basics of risk management and how to view investing from the perspective of managing through corrections and real deal bear markets. We provided an article written by a non-affiliated ETF manager, which I feel does a good job of simplifying what is often an over-thought and over-analyzed issue. The bottom line expressed in the article is that corrections up to and including losses of 10-20% are relatively common and a part of investing. They aren’t fun, but they just come with the business of putting your money to work for you. These types of corrections also don’t kill you. What can kill you is getting caught in a “real deal” bear market. These don’t happen often, yet you must always be prepared for the possibility of one. We haven’t had one since 2008-2009 (March 2020 doesn’t count in my opinion), so a lot of people have forgotten what it looks and feels like. I am afraid we are all going to get a refresher in 2022. 

This week we saw the bellwether S&P 500 sink well into bear market territory, down 23% since the beginning of January. The S&P follows the Nasdaq and Russell 2000 small cap indices, which are down in excess of 30% since recent highs. All this has occurred as inflation has hit a more than 40 year high and interest rates have skyrocketed. Rising bond yields have pummeled bond and fixed income investors to the same extent as equity investors. Simultaneously, we have the Federal Reserve on an all-out mission to crush inflation by reducing demand as quickly as possible. What this means is they are going to reduce liquidity (money supply) and access to capital so that people will stop buying things. That will certainly cause people to stop buying things, and it will also cause corporate profits to fall. That in turn will likely cause stock prices to continue to fall, which then makes everybody feel a little poorer every time they open their 401k statement or investment account. The poorer people feel the less likely they are to buy and so on and so on. This can become a vicious cycle in real deal bear markets. This is how and why stock prices can drop 50% or more. It is these profound drops that cause many investors to fail to reach their goals and why you must try and avoid these types of losses.  

So, how do you do that? We believe the answer is to have a process that dictates a plan of action when markets are moving into correction and bear market territory. The most important thing I took from last week’s article was the idea that we must be protected from catastrophic losses before markets begin the real deal bear market phase. If you want to wait for all the experts to tell you we’re in a real deal bear market, it’s already too late.  

Disclaimers

June 22, 2022

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The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq