📉 The stock market has decreased, with the S&P 500 experiencing a 1% drop last week, finishing at 5,954.50. It’s currently up 1.2% since the start of the year and up 66.5% compared to its closing low of 3,577.03 from October 12, 2022. If you’re interested in market movements, check out: Investing in the stock market can be a daunting experience 📉
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Whenever the stock market drops more than 1% in a day or a few percentage points over several days, I invariably feel that it’s the start of a larger sell-off.
This perception has been a constant during my 19 years of writing about the stock market. To be clear, it’s a logical concern because stock market history is filled with significant, prolonged declines. And we can count on substantial sell-offs, including bear markets, to occur in the future.
That said, one thing I have noticed over the years is my increasing comprehension of the data, which has improved my investing approach, making me less susceptible to making impulsive portfolio changes based on emotion.
Just last week, I found something intriguing in a Bespoke Investment Group blog post:
Emotional decision-making and investing are not compatible. Investors driven by emotion often sell during market downturns and buy when the market is rising. The correct strategy is to do the opposite. As illustrated below, if you only invested in the U.S. stock market the day after an up day since SPY trading commenced in 1993, your total return would be only 44%. Conversely, if you only invested on the day after down days, you’d have gained an astonishing 851%!
The accompanying chart is astonishing.
Indeed, buy-and-hold consistently outperforms. And merely holding on days after an up day can still yield positive returns.
However, holding exclusively on the day following declines—the days many investors may feel less optimistic—creates returns that significantly surpass those achieved on up days.
As we’ve previously discussed, the best days in the market often occur during the worst times. Nonetheless, I was taken aback by the substantial returns from only being invested on the day after every down day.
This knowledge is vital, particularly considering the probability of experiencing a down day in the stock market is nearly 47%. This accounts for the substantial negative press coverage the stock market receives. Had stock market news been presented monthly, quarterly, or annually, the likelihood of observing favorable stories would have been much higher.
Before you consider revising your investment strategy to solely invest the day following down days, remember that the buy-and-hold strategy continues to prove its effectiveness.
(By the way, this topic mirrors what we understand about stock market performance during different presidential administrations. You might assume that the stock market excels under Republican presidents, but in reality, it performs slightly better with Democratic leadership. Yet again, confining your investments to only when a particular party holds the presidency has historically led to poorer results. Consistent returns are achieved by holding stocks throughout both Republican and Democratic terms.)
It’s essential to acknowledge that we may be on the brink of a more significant downturn.
Historically, the S&P 500 has observed an intra-year maximum drawdown of 14%. Starting from February 19’s peak of 6,147, the index dipped 5% to a low of 5,837 last Friday. For this average movement, it would need to decrease to 5,286, which represents an 11% drop from the previous week’s closure.
That being said, it is also plausible that we won’t see such a steep decline anytime soon—the stock market tends to trend upwards.
Even if we are nearing a peak, accurately timing buys and sells to profit from peak trading is extremely challenging.
All this indicates that the most advisable approach for long-term investors is to maintain their positions and endure what could be a substantial downturn. As the saying goes, time in the market is more critical than timing the market.
Investing in the stock market is often a challenging endeavor. The best strategy involves establishing clear objectives and a well-thought-out plan based on your needs and timeline. From there, just ensure you have your seatbelts fastened for the stock market ride.
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Insights from TKer:
Several significant data points and macroeconomic events have transpired since our last analysis:
🏭 Business investment activity sees an uptick. Orders for non-defense capital goods, excluding aircraft—commonly referred to as core capex or business investment—rose by 0.8%, reaching a record $75.1 billion in January.
Core capex orders are a leading indicator, signaling future economic activity. Although growth rates had stabilized a little, they have shown improvement in recent months.
For further reading on core capex, check out: A bullish business investment narrative is emerging 🏭 and ‘Check yourself’ while the data fluctuates ↯
🎈 Trends in inflation are stabilizing. The personal consumption expenditures (PCE) price index saw a 2.5% increase year-over-year in January, down from December’s 2.6% rate. The core PCE price index, which is the Federal Reserve’s preferred inflation metric, rose by 2.6% during the month, close to its lowest level since March 2021.
On a month-over-month basis, the core PCE price index increased by 0.3%. If you annualize the rolling three-month and six-month figures, you’ll see that the core PCE price index has grown by 2.4% and 2.6%, respectively.
Inflation rates are remaining close to the Federal Reserve’s target of 2%, which has provided the central bank with room to lower rates while addressing other emerging economic challenges.
For further insights on inflation and monetary policy outlook, consider reading: The Fed wraps up a chapter with a rate cut ✂️ and The other side of the Fed’s inflation ‘misjudgment’ 🧐
🛍️ Consumer spending begins to cool. As per BEA data, for January, personal consumption expenditures fell by 0.2% month-over-month, resulting in an annual rate of $20.4 trillion.
Adjusted for inflation, real personal consumption expenditures decreased by 0.5%.
For deeper insights into consumer spending, read: Americans have money and they’re spending it 🛍️ and 9 once-hot economic charts that have cooled 📉
💳 Credit card spending trends remain stable. According to JPMorgan: “As of February 21, our Chase Consumer Card spending data (unadjusted) was 0.1% above the same day last year. Based on this data, we estimate that the US Census February control measure of retail sales m/m is 0.20%.”
Data from Bank of America states: “Total card spending per household declined by 0.9% year-over-year for the week ending February 22, based on BAC aggregated credit & debit card data. In comparison to the previous week, the most significant declines were in categories like entertainment, transit, and furniture. Spending growth remained robust in the West, but lagged in other regions, suggesting winter weather likely disrupted spending.”
For additional insights regarding consumer behavior, consider reading: Americans have money, and they’re spending it 🛍️
👎 Consumer sentiment takes a hit. The Conference Board’s Consumer Confidence Index dropped in February. According to the firm’s Stephanie Guichard: “February witnessed the largest monthly decline in consumer confidence since August 2021. This marks the third month in a row with month-over-month declines, bringing the Index to the lowest point of the range experienced since 2022. Out of the five components of the Index, only consumer assessments of current business conditions saw a slight improvement. Perspectives on current labor market conditions weakened. Consumers expressed skepticism regarding future business conditions and became less optimistic about future income. Negative perceptions regarding future employment opportunities heightened, reaching a ten-month peak.”
“The likelihood perceived by consumers of a U.S. recession occurring in the next 12 months increased in February.”
Relatively weak consumer sentiment indicators seem to contradict more robust consumer spending reports. For more on this disparity, read: Actions speak louder than words 🙊 and We’re going on that vacation, whether we enjoy it or not 🛫
👎 Consumers’ outlook on the labor market worsens. From The Conference Board’s February Consumer Confidence survey: “Consumers’ perceptions of the labor market were less positive in February. 33.4% of consumers reported that jobs were ‘plentiful,’ a decrease from 33.9% in January. Conversely, 16.3% of consumers believed jobs were ‘hard to get,’ an uptick from 14.5%.”
The disparity between these two percentages (known as the labor market differential) is closely monitored by economists and reflects a cooling labor market.
For further insights on the labor market, read: The labor market is cooling 💼
💼 Claims for unemployment benefits rise. Initial claims for unemployment benefits increased to 242,000 during the week ending February 22, up from 220,000 the previous week. This statistic remains at levels historically linked to economic growth.
For more on the labor market, read: The labor market is cooling 💼
⛽️ Gas prices decrease. According to AAA: “With winter nearing its end, warmer temperatures have led to a reduction in gas prices. This week, prices fell by three cents, resulting in a national average of $3.12 per gallon. Based on recent data from the Energy Information Administration (EIA), gasoline demand increased from 8.23 million b/d last week to 8.45 million. The total domestic gasoline supply rose from 247.9 million barrels to 248.3 million, although production decreased last week, averaging 9.2 million barrels per day.”
For additional insights on energy prices, consider reading: Rising oil prices had different implications historically 🛢️
🏠 Mortgage rates decline. Per Freddie Mac, the average 30-year fixed-rate mortgage dropped to 6.76% from 6.85% the previous week. Freddie Mac noted: “This week’s dip in mortgage rates marks the lowest level in over two months. The combination of lower mortgage rates and slightly improved inventory offers consumers in the market for a home some positive news.”
There are 147 million housing units in the U.S., with 86.6 million being owner-occupied and 34 million (or 40%) of these being mortgage-free. Among those with mortgage debt, the vast majority hold fixed-rate mortgages, and most secured those mortgages before rates surged from 2021 lows. This indicates that most homeowners are not particularly affected by fluctuations in home prices or mortgage rates.
For further discussions about mortgages and home prices, read: Why home prices and rents are causing confusion about inflation 😖
🏠 Home prices increase. According to the S&P CoreLogic Case-Shiller index, home prices saw a month-over-month rise of 0.5% in December. According to Brian Luke from S&P Dow Jones Indices: “Since 2020, national home prices have risen by 8.8% annually, particularly in markets in Florida, North Carolina, Southern California, and Arizona. While our National Index continues to outpace inflation, we are moving a few years away from the peak home price growth of 18.9% observed in 2021, and are now witnessing growth below the historical average of the index. Throughout this recent market cycle, the advantage for Americans in growing wealth through participation in the U.S. housing market—especially when leveraging a mortgage—has proven to be historically valuable.”
🏘️ New home sales decline. Sales of newly constructed homes plummeted by 10.5% in January to an annualized rate of 657,000 units.
🏢 Office buildings remain relatively unoccupied. From Kastle Systems: “Peak day office occupancy was 60.8% last Tuesday, a slight decrease of four-tenths from the previous week. In major cities like Washington, D.C., Chicago, and Philadelphia, Wednesday occupancy rebounded significantly following last week’s winter weather, up by 35.7 points to 59.6%, 21.5 points to 65.5%, and 12.8 points to 50.5%, respectively. In Dallas, occupancy on Wednesday dropped more than 20 points to 49.7%. The lowest average was recorded on Friday at 32.5%, down 3.9 points compared to the previous week.”
For further details on office occupancy, consider reading: This office occupancy statistic shows how far we still have to go to return to normalcy 🏢
📉 Near-term GDP growth forecasts are trending negative. As indicated by the Atlanta Fed’s GDPNow model, real GDP growth is projected to decline at a rate of 1.5% in Q1.
For further economic insights, read: 9 once-hot economic charts that have cooled 📉
Earnings outlook remains strong: The long-term perspective for the stock market remains optimistic, backed by forecasts for years of earnings growth. Ultimately, earnings are the key driver of stock prices.
Demand is on the rise: Demand for goods and services is holding steady, and the economy continues to grow, albeit at a more normalized pace compared to the hotter periods earlier in the economic cycle. The economy is less “tense” as major favorable factors like excess job openings have diminished.
However, growth is beginning to slow: To clarify, the economy is still robust, boosted by solid consumer and business financial health. Job creation remains solid, and the Federal Reserve—having addressed the inflation issue—has concentrated its efforts on supporting the labor market.
Actions speak louder than words: We’re presently in a peculiar phase where tangible economic data has diverged from sentiment-driven indicators. While consumer and business confidence has been relatively low, real consumer and business activities remain strong, trending at historical peaks. For investors, the continuity of positive hard economic data is the critical takeaway.
Stocks may outperform the economy: Analysts predict that the U.S. stock market could outperform the broader U.S. economy, largely driven by favorable operating leverage. Following the pandemic, businesses have significantly adjusted their cost structures through strategic layoffs and investments in innovative technologies like AI. These measures yield positive operating leverage, meaning that minor sales growth in a decelerating economy can lead to significant earnings increases.
Maintain awareness of inherent risks: Nevertheless, this doesn’t imply that we should become complacent. There will always be concerns that demand our attention, such as U.S. political uncertainties, geopolitical disruptions, energy price fluctuations, cyber threats, etc. Additionally, there are many unknowns that could surface, creating short-term market volatility.
Investing isn’t always predictable: Moreover, it’s vital to recognize the harsh truth that economic contractions and bear markets are realities that all long-term investors should be prepared for as they build their wealth in the markets. Always buckle your seatbelt for the stock market journey.
Focus on the long term: For now, there’s no reason to doubt that the economy and the markets will surmount whatever challenges arise over time. The long-term investment philosophy remains undefeated and is likely to keep progressing.
For further insights on evolving macroeconomic narratives, revisit the previous macro review »
The following summarizes some of TKer’s most engaging paid and free newsletters related to the stock market. Each headline is hyperlinked for easy access to archived content.
The stock market can indeed feel intimidating: real money is involved, there is an overwhelming amount of information, and significant losses can occur quickly. However, it is also a place where prudent investors have historically accumulated considerable wealth. The disparity between these two perspectives often stems from misconceptions about the stock market that can lead to poor investment choices.
Passive investing typically involves purchasing and holding a fund that tracks an index. There is no passive strategy that has garnered as much attention as the S&P 500 index fund. Yet, the S&P 500—comprising 500 of America’s largest companies—is anything but a static set of stocks.
For investors, any and all information about a company is relevant only if it also sheds light on earnings. This is because the long-term trajectory of a stock can ultimately be tied to the company’s underlying earnings, expectations thereof, and uncertainties surrounding those expectations. Over time, the correlation between stock prices and earnings is statistically robust.
