Corrective Patterns

February 21, 2022

As we go through half time in the first quarter of the year, most investors are looking at their account values and measuring how much they have given up since the highs. S&P 500 (the U.S. large cap index) posted its last all time high just a day or so into the new year, so the mark most people are looking at is the year end statement.

Today we are at levels we reached back in August of last year. So, we’ve been stagnant for 6 or so months. This is what we refer to as a corrective pattern. The question is how long will this last before we can start to break through to new highs again. Obviously, the answer is no one knows, however my best guess (which I have been stating for some time) is the first half of the year may well continue in this sideways movement and strengthen into the second half of the year.

There are several reasons for my hypothesis:

  1. We are in transition mode (as I wrote about recently, click here to read) form an economy being flooded with liquidity to tapering and onto a withdrawal plan.
  2. Inflation. The market is cautiously watching the Feds response to the high inflation numbers that are being posted. Back in 2018, the Fed handled this poorly, not in their actions, but by their comments. I’m convinced this time round they will be more cautious with their comments and ultimately do the right thing for the economy. We may see a comment or two taken out of context that may give us some headline risk.
  3. Russia/Ukraine. Uncertainty in the region is messing with oil prices, which has both positive and negative effects on the market. Good for oil stocks and defense contractors, bad for airlines and the economy, as high gasoline prices adversely affect disposable income. 
  4. China Lockdowns and Canadian protests. China still uses extreme measures to control outbreaks of Covid. You currently see or read about this through the Olympics, but there are cities of China that have strict lockdowns since the new year. Protests by truckers, upset about the country’s vaccination laws are still ongoing. The Canadian Prime Minister declared a national emergency to remove blockades and attempt to put an end to the protests, however delays of goods are still being seen. This leads to the last and pivotal point that touches the 4 previous points
  5. Supply Chain Issues. We all hoped that the disruption to the shortages in almost everything would be done by now, however we now realize that was a pipe dream. Estimates have moved from talking in quarters to years for normality to return. This is the effect of losing the Big Mo (momentum). 

So, the question no one has asked me yet, but is probably on their minds is, “Is this the end of the bull market and the start of the next recession, and pushing us into the next bear market??” I say no. It’s a normal pattern of market consolidation, especially after a prolonged, stimulated cycle. I think we are only now back to fair value in this market as indicated by my Buy/Sell. The market has been expensive for a long time now, and a pull back has been warranted. This is normal. This is what markets do! 

We will always have macro issues to contend with, like the five listed above. Markets attempt to look past them. I’ve stated for a long time that this run will end due to inflation, which will be witnessed when you start seeing a Euphoric pattern, e.g., goods selling for many times their normal price. I can hear some saying “I can’t even buy a car now…the dealer wants 10% over sticker.” I’m talking about when the dealer wants double or triple, and people are paying it. That’s euphoric. 

Selling out and/or staying on the sideline is not an option in these times. You may get it right and cash in to watch the market go down 10%. The problem is when do you get back in? There is no bell that is rung at the top or bottom, so the only option is to overweight and underweight, and to always be on the lookout for opportunities. There are bright spots in the market today, there are things, in my opinion, that are very cheap. There are also areas of investments that have been clobbered recently and will probably continue to get clobbered, such as long-term bonds. These are areas to stay away from.

The best thing we can all do at this stage is understand normal market movements, (including corrections). Realize that these cycles can take some time to work themselves through and make an action plan in case of certain events happening, rather than making decisions on emotion. 

My articles each week attempt to give you insight into what I’m thinking, but if it’s too deep of a read, which I know it can be, feel free to give me a call and I’ll run you through it. Remember, these are the times I’m excited about. When assets price on fundamentals rather than government interventions. It all comes back to earnings.

HWFFS

Serve

It was National Random Acts of Kindness Day last week, February 17th. Most know that I am Chairman of a 501c3 in our local area titled Brevard Random Acts of Kindness inc. It was started as Facebook group with a few hundred members as a way of community helping each other. Whether it be matching people together to receive goods (someone’s trash is another’s treasure), recognizing a community hero, working to provide items for other non-profits in our area, finding a deserving person in need of something and going out and getting it, or simply doing little random acts around town. We wanted to take out the middleman of philanthropy and ensure money that was raised or donated, went directly to the cause or person in need, and hopefully encourage them and others to pay it forward.

Being involved with this organization has been greatly rewarding. I get to see firsthand the impact that not only this organization has, but also when the community rallies together and helps out each other.  I’ve been able to meet so many remarkable people who both dish out the assistance (literally) and those who have received it and are now reaching their goals. I’m proud to say that the organization is now in full swing with a ton of programs and kindness being spread. Take a look at the Facebook page Brevard Random Acts of Kindness | Facebook or Instagram @brevardrandonacts to see what’s being done and get some ideas to spread kindness.

The road to get here was not the smoothest. No matter how well intended you are, there will be some skeptics, cynics, and people who are negative. But that should not deter you from your desire to make a difference, even if it’s for just one person. The setbacks that Lori, Justin, and I had early on with this, make it all the sweeter when we see the impact that performing Random Acts deliver. The Facebook group is fast approaching 6,000 members and with our planned future random acts and campaigns, I have no doubt that it will be at 10k very soon. Talk about compounding!!!!

Kindness is cool. That’s our current marketing campaign. Performing a Random Act is a true win/win, for both the person performing the act, as well as the person receiving it. There is some great science behind it, check out this quick video. Random Acts of Kindness | The Science of Kindness

This is how I’ve decided to serve and give back. My idea of serving may not be yours, and that’s cool as well. But I do hope at the very least you’ll cheer us on as we try to make a positive impact in our little town. 

Mick Graham, CPM®, AIF® Branch Manager Raymond James Financial Advisor Melbourne, FL

Mick Graham, CPM®, AIF®

Branch Manager Raymond James

Financial Advisor Melbourne, FL

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