Ameriprise Financial Inc.
05/23/2022 | Press release | Distributed by Public on 05/23/2022 13:56
Investors Should Prepare for More Stock Pressure Ahead
Last week, the S&P 500 Index lost 3.1%, touching a bear market for the first time since March 2020 at the onset of the pandemic. While the index did not officially close in a bear market last week, given a majority of its constituents have already fallen by more than 20% from their 52-week highs, we believe it's safe to assume the bears are firmly in control of the market at present.
In addition, the S&P 500 logged its seventh straight week of declines, its longest consecutive losing streak since 2001. The tech-heavy NASDAQ Composite fell 3.8% on the week, also sliding lower for its seventh straight week of losses. And helping to round out the abysmal slide lower, the 30-stock Dow Jones Industrials Average dropped by 2.9% on the week. The Dow has declined for eight consecutive weeks, its longest losing streak since 1923.
However, Treasury prices held their ground with stock volatility elevated. The 10-year U.S. Treasury yield settled the week at 2.78%, after peaking above 3.0% earlier this month. Across currencies, the U.S. dollar lost 1.5%, its sharpest weekly drop since February and breaking six consecutive weeks of gains. The U.S. Dollar Index is up over +7.0% this year. Gold ended the week at $1845 per ounce (its fourth week of gains), while West Texas Intermediate oil finished at roughly $110 per barrel. Crude prices are higher by over +48% this year, which has intensified inflation pressures across the globe.
Real-time Data Shows Growth is Slowing Making the Environment for Stocks Very Challenging
Consumer-driven stocks crumbled last week based on reactions to mixed but primarily downbeat retail earnings reports. And while April retail sales largely showed broad-based consumer strength, there is growing scrutiny that backward-looking economic data on the consumer does not fully recognize the rapidly shifting real-time adjustments consumers appear to be making in light of higher inflation. Moreover, larger than expected drops in regional manufacturing surveys and housing starts and existing home sales in April (each logging their third-straight monthly decline in the face of higher mortgage rates) lend building evidence that growth is slowing. As such, the market narrative is extremely negative today, and stocks have been unable to catch a lasting bid with uncertainty this elevated.
For now, we believe the path of least resistance for the market is lower, meaning investors should prepare themselves for the potential of further stock pressure ahead. The Federal Reserve is not planning on bailing out stock investors, at least at current levels. Inflation is high. Interest rates have reset higher. And economic growth is normalizing from unsustainable levels. At the same time, weak investor/consumer sentiment, equity outflows, concerns about corporate profit margins, ongoing supply chain issues, and shifting spending patterns have stocks resetting to the realities of the day. Often when bubbles burst, the market narrative becomes excessively negative - similar to where we stand at the moment.
As you manage through this period of elevated market volatility, below are a few critical points to help add perspective:
The concern of a global recession is high. In the U.S., high inflation and tighter Federal Reserve policy have investors fearful the Fed will choke off growth and cause a recession here at home. In addition, COVID-19 lockdowns in China are significantly stalling growth domestically and globally, further pressuring already stretched/broken supply chains. In Europe, an energy crisis is causing consumers to buckle under the pressure, as the cost-of-living expenses become unmanageable for a larger share of the region. Lastly, a potential food crisis in emerging markets later this year, sparked by the Ukraine war, has prompted Sri Lanka to default on its foreign debt to use hard currency to import food, fuel, and medicine. Also, India recently said it would curb grain exports to ensure it had enough supply domestically. In our view, these challenges are unlikely to go away anytime soon and increase the risk of a harder landing for the global economy. Therefore, stock prices are quickly resetting to the idea that the world is in the process of slowing much more significantly than current economic data and forecasts suggest. However, the stock market discounts the future and, at some point, will start looking ahead to a brighter future.
History suggests investors are unlikely to time the market bottom accurately and are highly likely to miss a significant portion of the rebound if they deviate from their well-constructed investment strategy. Considering everything you've just read, we know it's tempting to hit the eject button on stocks at this point. Human instinct is to avoid pain. Unfortunately, if we are already in a bear market and recession odds are building, history also suggests the S&P 500 has more room to fall. So, why not move to the sidelines and avoid the last leg lower? The problem with that type of thinking is that markets see their best and worst days bunched together, and they usually occur in the kind of market environment we find ourselves in today. Over the last 20 years, the S&P 500 has averaged a return of +6.8% annually. But if you missed just 25 of the S&P 500's best days during that period, your return would fall to an annual decline of 1.1%. We certainly wouldn't argue with investors seeking to employ tactics and strategies to help mitigate the selling pressure. But meaningfully reducing stock exposure at this point increases the risk one would miss significant upside gains, and by the time they felt comfortable reallocating to equities.
Speaking of the downside risk for stocks, if the S&P 500 falls to near its average 24% bear market drawdown since WWII, the index could touch a level of roughly 3,650 or approximately 7.0% lower from here. If the index sinks by its average bear market drawdown since 1950 of about 35%, that could put the S&P 500 near the 3,100 level or another roughly 26% lower. Yet, a market low point is rarely a destination and merely the starting point of the next journey higher. With a properly allocated portfolio, a strategy for continued investment, and enough time on your side, history is very clear on bear markets. Long-term investors that stay the course through volatility are rewarded over time. In every bear market since 1950, once the S&P 500 reaches a trough, the index has always been higher over the next six and twelve months as well as over the next one year, three years, and five years. In many instances, average performance over these periods is well above long-term historical returns.
Diversification still works. A well-constructed portfolio of stocks, bonds, cash, and alternatives has outperformed a portfolio of just stocks this year. And while both stocks and bonds are down at the same time (historically an infrequent occurrence), the combination of both inside a portfolio with the help of alternative strategies has lowered overall portfolio risk and mitigated steeper losses across stocks. For example, a conservatively allocated portfolio is outperforming the S&P 500 by roughly 800 basis points this year, while a moderately allocated portfolio is outperforming by approximately 500 basis points. While diversification does not eliminate the potential for loss, it often dampens downswings, leaving a smaller hole to climb out of once markets turn higher. In such an uncertain world, at least the principles behind diversification remain clear.
Looking ahead to this week, additional retail Q1 earnings reports should continue to lend insight into the strength of the consumer and how companies are managing higher input costs/supply chains. In addition, investors will receive their first preliminary looks at May manufacturing and services activity as well as April new home sales. Given slowing trends across activity and housing, we suspect investors will be focused intently on this week's economic releases. Notably, the May FOMC meeting minutes, a second look at Q1 GDP, April PCE (the Fed's preferred inflation metric), and final May University of Michigan sentiment could play important roles in shaping market action this week.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.
The fund's investments may not keep pace with inflation, which may result in losses.
A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund's income and yield. These risks may be heightened for longer maturity and duration securities.
Diversification does not assure a profit or protect against loss.
There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.
Alternative investments cover a broad range of strategies and structures designed to be low or non-correlated to traditional equity and fixed-income markets with a long-term expectation of illiquidity. Alternative investments involve substantial risks and may be more volatile than traditional investments, making them more appropriate for investors with an above-average tolerance for risk.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
The Standard & Poor's 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees. It is not possible to invest directly in an index.
The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.
In addition, the S&P 500 logged its seventh straight week of declines, its longest consecutive losing streak since 2001. The tech-heavy NASDAQ Composite fell 3.8% on the week, also sliding lower for its seventh straight week of losses. And helping to round out the abysmal slide lower, the 30-stock Dow Jones Industrials Average dropped by 2.9% on the week. The Dow has declined for eight consecutive weeks, its longest losing streak since 1923.
However, Treasury prices held their ground with stock volatility elevated. The 10-year U.S. Treasury yield settled the week at 2.78%, after peaking above 3.0% earlier this month. Across currencies, the U.S. dollar lost 1.5%, its sharpest weekly drop since February and breaking six consecutive weeks of gains. The U.S. Dollar Index is up over +7.0% this year. Gold ended the week at $1845 per ounce (its fourth week of gains), while West Texas Intermediate oil finished at roughly $110 per barrel. Crude prices are higher by over +48% this year, which has intensified inflation pressures across the globe.
Real-time Data Shows Growth is Slowing Making the Environment for Stocks Very Challenging
Consumer-driven stocks crumbled last week based on reactions to mixed but primarily downbeat retail earnings reports. And while April retail sales largely showed broad-based consumer strength, there is growing scrutiny that backward-looking economic data on the consumer does not fully recognize the rapidly shifting real-time adjustments consumers appear to be making in light of higher inflation. Moreover, larger than expected drops in regional manufacturing surveys and housing starts and existing home sales in April (each logging their third-straight monthly decline in the face of higher mortgage rates) lend building evidence that growth is slowing. As such, the market narrative is extremely negative today, and stocks have been unable to catch a lasting bid with uncertainty this elevated.
For now, we believe the path of least resistance for the market is lower, meaning investors should prepare themselves for the potential of further stock pressure ahead. The Federal Reserve is not planning on bailing out stock investors, at least at current levels. Inflation is high. Interest rates have reset higher. And economic growth is normalizing from unsustainable levels. At the same time, weak investor/consumer sentiment, equity outflows, concerns about corporate profit margins, ongoing supply chain issues, and shifting spending patterns have stocks resetting to the realities of the day. Often when bubbles burst, the market narrative becomes excessively negative - similar to where we stand at the moment.
As you manage through this period of elevated market volatility, below are a few critical points to help add perspective:
The concern of a global recession is high. In the U.S., high inflation and tighter Federal Reserve policy have investors fearful the Fed will choke off growth and cause a recession here at home. In addition, COVID-19 lockdowns in China are significantly stalling growth domestically and globally, further pressuring already stretched/broken supply chains. In Europe, an energy crisis is causing consumers to buckle under the pressure, as the cost-of-living expenses become unmanageable for a larger share of the region. Lastly, a potential food crisis in emerging markets later this year, sparked by the Ukraine war, has prompted Sri Lanka to default on its foreign debt to use hard currency to import food, fuel, and medicine. Also, India recently said it would curb grain exports to ensure it had enough supply domestically. In our view, these challenges are unlikely to go away anytime soon and increase the risk of a harder landing for the global economy. Therefore, stock prices are quickly resetting to the idea that the world is in the process of slowing much more significantly than current economic data and forecasts suggest. However, the stock market discounts the future and, at some point, will start looking ahead to a brighter future.
History suggests investors are unlikely to time the market bottom accurately and are highly likely to miss a significant portion of the rebound if they deviate from their well-constructed investment strategy. Considering everything you've just read, we know it's tempting to hit the eject button on stocks at this point. Human instinct is to avoid pain. Unfortunately, if we are already in a bear market and recession odds are building, history also suggests the S&P 500 has more room to fall. So, why not move to the sidelines and avoid the last leg lower? The problem with that type of thinking is that markets see their best and worst days bunched together, and they usually occur in the kind of market environment we find ourselves in today. Over the last 20 years, the S&P 500 has averaged a return of +6.8% annually. But if you missed just 25 of the S&P 500's best days during that period, your return would fall to an annual decline of 1.1%. We certainly wouldn't argue with investors seeking to employ tactics and strategies to help mitigate the selling pressure. But meaningfully reducing stock exposure at this point increases the risk one would miss significant upside gains, and by the time they felt comfortable reallocating to equities.
Speaking of the downside risk for stocks, if the S&P 500 falls to near its average 24% bear market drawdown since WWII, the index could touch a level of roughly 3,650 or approximately 7.0% lower from here. If the index sinks by its average bear market drawdown since 1950 of about 35%, that could put the S&P 500 near the 3,100 level or another roughly 26% lower. Yet, a market low point is rarely a destination and merely the starting point of the next journey higher. With a properly allocated portfolio, a strategy for continued investment, and enough time on your side, history is very clear on bear markets. Long-term investors that stay the course through volatility are rewarded over time. In every bear market since 1950, once the S&P 500 reaches a trough, the index has always been higher over the next six and twelve months as well as over the next one year, three years, and five years. In many instances, average performance over these periods is well above long-term historical returns.
Diversification still works. A well-constructed portfolio of stocks, bonds, cash, and alternatives has outperformed a portfolio of just stocks this year. And while both stocks and bonds are down at the same time (historically an infrequent occurrence), the combination of both inside a portfolio with the help of alternative strategies has lowered overall portfolio risk and mitigated steeper losses across stocks. For example, a conservatively allocated portfolio is outperforming the S&P 500 by roughly 800 basis points this year, while a moderately allocated portfolio is outperforming by approximately 500 basis points. While diversification does not eliminate the potential for loss, it often dampens downswings, leaving a smaller hole to climb out of once markets turn higher. In such an uncertain world, at least the principles behind diversification remain clear.
Looking ahead to this week, additional retail Q1 earnings reports should continue to lend insight into the strength of the consumer and how companies are managing higher input costs/supply chains. In addition, investors will receive their first preliminary looks at May manufacturing and services activity as well as April new home sales. Given slowing trends across activity and housing, we suspect investors will be focused intently on this week's economic releases. Notably, the May FOMC meeting minutes, a second look at Q1 GDP, April PCE (the Fed's preferred inflation metric), and final May University of Michigan sentiment could play important roles in shaping market action this week.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.
The fund's investments may not keep pace with inflation, which may result in losses.
A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund's income and yield. These risks may be heightened for longer maturity and duration securities.
Diversification does not assure a profit or protect against loss.
There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.
Alternative investments cover a broad range of strategies and structures designed to be low or non-correlated to traditional equity and fixed-income markets with a long-term expectation of illiquidity. Alternative investments involve substantial risks and may be more volatile than traditional investments, making them more appropriate for investors with an above-average tolerance for risk.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
The Standard & Poor's 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees. It is not possible to invest directly in an index.
The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.