Under the Hood Q3 2022
by Danno
Remember, if you look at the S&P 500 on a...
Daily basis, you can expect it to be down about 47% of the time.
Monthly basis, you can expect it to be down ~37% of the time.
Quarterly basis, you can expect it to be down ~31% of the time.
Annual basis, you can expect it to be down ~25% of the time.
5-year basis, you can expect it to be down ~12% of the time.
10-year basis, you can expect it to be down ~6% of the time.
20-year basis, you can expect it to be down ~0% of the time.
Here is the update to JP Morgan's outstanding graphic on annual max drawdowns in the S&P...
As a reminder, here is the S&P 500 monthly chart in logarithmic scale over that same 40-some year period:
And here's that same chart on a linear scale, demonstrating the magic of compounding:
Now let's go "under the hood" again and take a closer look.
The US style box looks something like this for the first 9 months of 2022:
I've written and said many times that I see this simply as the 3rd phase of the COVID experience. With this whole cycle of COVID closing the economy, then the reopening trade, and now the inflation and rising rates. Here is the total performance from January 2020 through Q3 2022:
I thought that Large Cap Growth would be the biggest winner from the onset of the pandemic, but they've been giving back their lead this year. Small Growth peaked at the same time as the GameStop saga in January 2021, with all the newbie investors piling in, and they've been punished ever since. How much will the market punish Growth indiscriminately before it finds a long-term bottom and resumes leadership? Another month? 3 months? 3 years? No one knows.
Now some of the basic asset classes year-to-date:
Oil (commodities) spiked in Q1 of 2022, but has been falling consistently since early June. It's still up very nicely on the year. Nothing else worked. For years, Advisors have included a sleeve of commodities in client portfolios and talked about diversification, and investors have complained about their lack of performance. Gold got the job done in 2020, and Oil did that job in 2022. Generally, when rates rise, bond values go down. There's no surprise there. In this case, when the Fed raises rates more rapidly than ever before in history, stocks have gone down too.
Combining this whole 33-month COVID period looks like this:
International markets have lagged now for more than a decade. I can't tell you when, but that will reverse violently at some point. Probably when this current period of geopolitical and economic uncertainty in Europe looks like it can only get worse.
Check out how various bond styles have done this year:
An absolute bloodbath, across the board. Year-to-date, that makes this the worst year in bonds that I can find in US history! Notice how the longer-term Treasuries have done incrementally so much worse than the incrementally shorter-term Treasuries?… That's the same impact that you see in the longer-term Growth stocks versus the shorter-term Value stocks. The market seems to be reasonably pricing in the Fed rate hikes now, so the end of the pain should be near.
And by Sector for 2022 YTD:
The defensive sectors led this year, including an explosion in US oil-related stocks back in Q1. Not surprising that any of these sectors are doing relatively well in this environment, mostly just surprising that we are in this environment. The Growth-ier sectors have done the most poorly this year (see previous commentary on rising rates).
Since the start of 2020:
US Energy stocks are the leaders after a remarkable Q1 this year. Outside of that, the real stunner is the recent fall in Communications. Netflix and Facebook have both gotten killed the last 6 months, and those are (were) heavy weightings in that sector. I've ridiculed Facebook for years, but it's been a monster of a stock prior to this collapse.
Otherwise, Tech is still the big winner, along with Health Care, Materials, & Discretionary, all of which were also early obvious beneficiaries of the pandemic.
It'll be awhile before we know how things shake out with the war in Ukraine and with the Fed, but those are events. In other words, it's a trade.
We won't be able to look back and say with certainty who "won" the pandemic until 3-to-4 years from now, taking a view of the the entire 5-to-7 year period. It sure is interesting to watch the dramatic shifts in the short-term trading dynamics along the way though.
No one nails these swings from one leadership group to another. The reasons why someone nails one call, are the same reasons why they see their returns evaporate on the next call. They just chase their tails, barking loud when they are right, and staying silent when they are wrong.
Don't worry about all that. Just stay the course, and let the probabilities work for you over time.
Now go drop some knowledge on a friend. I'm out.
Legal Disclosure: This is not Investment Advice. The commentary on thetransparentadvisor.com reflects the personal opinions, viewpoints, analyses, and often sarcasm of Danno Hoff and should not be regarded as a description of services provided by his employer or its affiliates. The opinions expressed in this website are for general informational and entertainment purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry and provoke thoughts. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Any indices referenced for comparison are unmanaged and cannot be invested into directly. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.