By Matthew Gaude & Shawn McGuire
The last time the market exhibited extreme fear was back in March of 2020. Now, don’t get me wrong—our current situation is not anywhere near what we experienced at that time. In fact, the fear was so extreme back then, it was actually worse than the bottom struck back in March of 2009.
Nevertheless, the fear is certainly palpable today as well. One by one, analysts are coming out and telling us that the bear market has begun. And they have a myriad of reasons for their certainty about this “new” bear market conclusion. Yet, even before this decline began, I warned you quite strongly that this is what we are going to see. The reason I did so was so that you could emotionally prepare yourself for the fact that you are going to have to fight the pervasive negative sentiment for us to hit that “buy” button at a time when it will feel the hardest to do so. Let’s take a look at what’s going on.
A Time for Opportunity, Not Panic
It’s been a while since we’ve seen even a hint of fear in the stock market. But with the correction hitting 12% on Monday, January 24, some signs of short-term panic emerged.
Even with that reality, though, the majority of American investors are once again very scared about the stock market. In fact, CNN’s “Fear & Greed Index” shows that we hit “Extreme Fear” levels several times toward the end of 2021—for the first time since the bottom of the COVID-19 crash in 2020. And with the market’s recent sell-off, investors are getting scared once again. Take a look:
And as we’ve seen throughout history, these moments of extreme pessimism and fear—like what we’re seeing right now—make the best opportunities for investors. We saw it back in 2009 when everyone was still too spooked to buy. And yet, it turned out to be the greatest buying opportunity in American history.
Of course, we saw it again in mid-2020, when COVID-19 was still casting a long shadow of pessimism over our country’s economy. And we all know what happened next: stocks went on to double off of their March 2020 bottom.
Everyone and their mother is likely going to be convinced (if they are not already) that a bear market has begun. It must be that way. You see, the sentiment has to turn negative enough to support our next rally to 5500SPX, which is 1100 points away from where we closed on Friday. So, from the bigger picture, I still think the probabilities reside with the bull market continuing in the coming year.
Bull or Bear?
Here are the year-to-date returns through 1/31/22 for the major stock indices:
One area I want to highlight is the fact that growth stocks, technology, and healthcare/biotechnology stocks incurred the majority of the selling this quarter. Here is a chart of the S&P 500 index vs. S&P 500 growth index for January:
Here is the Nasdaq and the Nasdaq 100 Technology sector’s returns for January:
Over the last several weeks, I have been trying to prepare you for the potential for this pullback to take us down by several hundred points. We entered 2022 on a cautious note by selling some positions during December and early January (or holding on to existing cash in your account) in anticipation of this decline we are experiencing to be able to deploy cash and add to existing positions or add new positions at attractive levels.
My overall suggestion to those reading this update is that this is a great time to add to your long positions as the market seems to be forming a bottoming structure and preparing for the next rally toward our ideal target in the 5500SPX region. Should we see a lower low, it will allow us to buy additional positions in the coming weeks.
The main point I want you to come away with is that we outlined our expectation coming into the first quarter that we would experience greater volatility and a 7%-10% pullback during the first quarter of 2022. As of right now, we are likely completing this decline, and my expectation remains that we will likely be rallying to new market highs toward 5500SPX as we move into the second quarter of 2022 and beyond.
To summarize my thoughts, the market has now left me with the conclusion that this pullback has not yet likely run its course. I am going to allow the market to bounce before I make any further strong conclusions about a bottom being in place yet. I maintain a strong expectation for a continuation rally to begin over the coming weeks, which will likely be pointing us to the 5500SPX region later this year or early next. This bull market is likely far from dead, and any reports of its demise are greatly exaggerated and quite premature.
Questions? We Are Here for You
As we say goodbye to January, in what I can only describe as an unusual and uncertain time, we find it best to overcommunicate in times like these. We emailed our Quarterly Insights newsletter on January 20, our quarterly market and economic review and strategy update On-Demand Webinar on January 27, and we will be providing you with a short monthly review as well to keep you updated. In the meantime, if you have any questions or would like to schedule a virtual or in-person meeting, call our office at 770-552-5968 or email [email protected]. Or, if you prefer, you can simply click here to schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc. (APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk, and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. Seek tax advice from a tax professional. Neither APFS nor its Representatives provide tax, legal or accounting advice.