Welcome to the March edition of FAQ’s and RAQ’s!
Here we answer client questions -- some asked Frequently, and others asked Rarely.
FAQ: Is the bear market in stocks over?
The answer to this question is easy: nobody knows!
Even so, we should define what it means for a bear market to be “over.”
One way for a bear market to be over is for stock prices to bottom. The most recent low was on October 13th when the S&P 500 fell to 3491, 14% below its recent level.
Using this framework, there’s a good chance (but no guarantees) that the bear market is over. One reason: Big Tech companies, which together make up a large percentage of the S&P 500, fell substantially last year. The S&P 500 falling below its prior low likely would require another big decline in these stocks on top of last year's losses, and it’s hard for us to be that bearish.
Another way to think about a bear market being over is: has a new bull market begun?
On this point, the jury is still out. There is too much uncertainty with inflation and Federal Reserve policy to say that stocks are on a new, upward trajectory.
Instead, the chart below may be a good framework for thinking about the stock market’s direction over the short-term. The forces driving stocks up and down seem to be self-correcting. If this framework is right, then it’s possible to be too bullish or too bearish on the short-term outlook. It may not be until investors are convinced that inflation is settling down for good that a new bull market can be declared.
RAQ: Mortgage rates have skyrocketed. Are there ways for investors to take advantage?
We believe so!
When bad economic news hits, we like to ask: Is there a silver lining? And if so, can investors capitalize on it?
For example, when high gasoline prices cause pain at the pump, there’s a silver lining: energy companies are likely making money, and energy stocks may be a good investment.
Likewise, we think there’s a silver lining to rising mortgage rates, which is that mortgage-backed securities (MBS) offer relatively attractive yields, in our view.
MBS are a type of bond that is backed by mortgage payments. Mortgage payments that are sent to banks or mortgage servicing companies typically don’t stay with those institutions. Instead, the payments are frequently packaged together into MBS and sold to investors.
There are many types of MBS. Some are backed by government-sponsored agencies and are relatively safe in terms of credit quality (the chart above tracks bonds issues by these agencies). Others offer higher returns but entail more risk. They key point is that high mortgage rates mean that MBS may offer an attractive opportunity, in our view.
MBS can be purchased individually or through a mutual fund. They also involve unique considerations and risks that should be discussed with your Financial Advisor before purchasing. If you’d like to discuss further, please give us a call.
Fixed income is generally considered to be a more conservative investment than stocks, but bonds and other fixed income investments still carry a variety of risks such as interest rate risk, credit risk, inflation risk and liquidity risk. In a rising interest rate environment, the value of fixed income securities generally declines and conversely, in a falling interest rate environment, the value of fixed income securities generally increases. High-yield securities may be subject to heightened market, interest rate or credit risk and should not be purchased solely because of the stated yield.