Bad News Makes Us Nervous
It’s certainly easy to get nervous about your investments after the barrage of bad economic news last week.
The Federal Reserve raised its federal funds rate by 75 basis points on Wednesday—the 4th time they have raised it this year. Rates were increased 25 points in March, 50 in May, and 75 in June in order to fight a rise in inflation, not seen in 40 years.
The Bureau of Economic Data released data showing the U.S. GDP shrank by 0.9% during the second quarter, which is the second straight quarter of negative growth. Typically, this signals that we are in a recession, despite how the current administration wants to define a recession. The last 10 times we experienced two consecutive quarters of negative growth, those time frames were considered recessions. So let’s just call it what it is.
Should I Sell?
This type of news often causes investors to consider whether or not to sell their investments and move into cash until the economy picks up. If you were going to do that, the correct timing would have been in February 2022, not now. Nobody can say with 100% certainty when a market bottom will occur, and the current rally may just be a head fake, but the probability that we are closer to a bottom now is much more likely than not. Selling now would contradict the old adage of “buy low and sell high,” meaning the likelihood is you would be selling low.
The field of Behavioral Finance, though relatively new, has gathered a lot of data that confirms that many investors do sell closer to the bottom than to the top. Conversely, they then buy closer to the top than to the bottom. As a result, many such investors rarely look at their account statements. They simply hope for the best. Of course, the closer you are to retirement, the less time you have to depend on the “buy and hope” strategy.
So What Do I Do?
First of all, remember that the economic data being released looks backward. If two consecutive quarters of negative economic growth defines a recession, that really means we entered a recession sometime back in the 1st quarter of 2022. It’s difficult to make investing decisions looking backward at the economy.
The stock market is a forward-looking mechanism. In other words, it is a leading indicator because its valuations are based on future earnings estimates. Last week, when all the bad news I previously mentioned was being reported, the stock market was rallying. The interest rate increase and the fact that we are in a recession had already been priced into the market back in May and June. As a result, the Wall Street firms are looking ahead to the rest of this year and into next year, where they are expecting the economy to improve, so they are buying.
There is no guarantee that some unforeseen event (think Covid) won’t catch the markets off guard, and prices will tumble, but right now the prices are probably better than they will be in one or two years. This is where it pays off to be a patient investor.
Where Are We Now?
On July 1, I posted a chart of the Nasdaq index and stated, “The price is below both the 50- and 200-day moving average with the 50-day below the 200-day. Price has not been above the 50-day since mid-April, so a break above the blue line would be a good indicator of a market bottom. Also, we would like to see the price stay above the bottom green line and start seeing higher lows.”
On the 15th of July, I posted the same chart of the Nasdaq and added the fear index below it. At that point I said, “Over the last month, it has made higher lows and higher highs (blue arrow). The VIX chart (called the fear index), just below the Nasdaq, has been moving down the last month which indicates the fear is decreasing among traders and they are more willing to buy stocks.” Two weeks later, we can see the price has broken above the 50-day moving average, and we continue to see higher highs and higher lows. It’s possible that the price could break down and there will be a testing of the 50-day moving average, but, if it holds, that will be another positive indication that we are moving out of this correction.
Feel free to contact me if you have questions. Have a great week.
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