by Franklin J. Parker, CFA
Rather than the regularly-scheduled weekly update, I feel that recent market gyrations justify a special and more focused update. Let’s first look at what prices are doing and how this fits in my short-term view. Then, let’s address how this affects our investment strategy.
Short-Term Market View
The past week and a half have seen stocks generally selling-off, with tech stocks leading the way. “Selling-off” is relative, of course. Despite all the drama, the S&P 500 was down less than 6% from its recent high, which is not particularly noteworthy. We get about a 4% selloff every month, and an 8% to 10% selloff about every year.
What is noteworthy is the change of character in stocks. The upward trend that has been in place since the beginning of 2021 was firmly broken last week (see chart below). That signals to me that, in the short-term at least, the S&P 500 (and stocks more broadly) may trade sideways for the next few weeks: bouncing between about 4460 at the high and around 4180 as a low (if I had to guess—emphasis on guess).
This is, by the way, quite similar to the pattern we saw in 2020. As the chart below demonstrates, we had a firm upward channel that had formed in the S&P 500’s price that was broken around September. That break began a sideways trading range that lasted about a month. Around November, however, markets began to again march higher and that formed the upward channel that we have been in since January of this year—the channel that was just broken.
While prices may move a bit lower in the short-term, this is not worth paying taxable gains to avoid by selling out of positions. At most, I could see markets selling down about 10% from their recent high, but that would still put our portfolios up for the year. Furthermore, as I mentioned above, I see this as short-lived, maybe a month to a month and a half at most.
Longer-term, I see both the Fed’s ongoing money-printing and the economy’s ongoing re-opening/expansion to put a tailwind to stock prices. Any pullback, then, is likely to be short-lived, in my view.
Investors, then, should use any pullback to deploy excess cash and/or rebalance their portfolios.
These short-term swings, as anyone will tell you, are notoriously hard to gauge. For investors who have longer time horizons, we really should not be too concerned about them—especially since the costs of attempting to avoid them can be excessive. Selling appreciated investments creates a tax cost. Getting back in at exactly the right time is very difficult as markets tend to reverse course quite quickly and often for no reason at all. That means we can be left in cash as stocks rally.
All-in-all, exactly how you position your investment portfolio will be a function of many things, most importantly your particular goals. For a market that has given few opportunities to enter at more reasonable levels, my bias is to see this as an entry point, not an exit.
I would, of course, be delighted to talk this through with you.
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