Nowhere to Run To (Yet) … Nowhere to Hide


David Sowerby, CFA, Managing Director, Portfolio Manager

This line from Martha and the Vandellas’ 1965 hit describes the investment environment in 2022 quite well. Nearly all major asset classes are meaningfully lower this year. Indeed, even if you got the higher inflation call right a year ago, outside of holding cash, there have been limitations on navigating this market. The following shows key asset class returns in 2022 to date.

Index 2022 YTD Return
S&P 500 Index -20.2%
MSCI All Country World Index -21.7%
Bloomberg REIT Index -24.2%
Bloomberg U.S. Aggregate Index -13.5%
Bloomberg U.S. Corporate High Yield Index -12.7%
S&P/LTSA Leveraged Loan Price Index -5.1%
Gold -8.7%

Source: Bloomberg, YTD as of 09/22/2022

Adhering to the long-held belief that no one can time the market successfully or call a bear market bottom, there are a few interesting facts which offer some compelling news in this current bear market.

  1. Bear markets traditionally test their lows before eventually going higher on a sustained basis. Currently, we are very near where the S&P 500 lows of mid-June were, hence the normal but unpleasant test of the lows.
  2. The median U.S. stock is now trading 33% below its own 52-week high. That level of decline is consistent with past bear market bottoms.
  3. The AAII Sentiment Survey shows that individual investor’s sentiment has reached 60% bearish this week, one of the few times in the last 30 years that bearish sentiment was at this level. This sentiment is typically a good contrarian indicator. It is certainly not time to capitulate, but perhaps time to be a selective and tactical net buyer.

While there may not be a time in the near term to be an aggressive buyer, there are more opportunities today when assessing the valuations in the markets. This exists both in the stock and bond markets. Hedged alternatives and event driven opportunities remain an appealing aspect in a diversified portfolio solution as well. In terms of stocks specifically, valuing companies on a cash flow and free cash flow basis provides a more reliable metric given earnings estimates can be more volatile in a weaker economic environment. It also sharpens the focus on high quality companies that are not only poised to endure challenging economic periods, but can emerge from downturns positioned even stronger within their industry. Currently, corporate cash flows have fared reasonably well and individual company guidance suggests that weaker stock prices are not commensurate with the underlying health of many U.S. companies.

Of course, all this matters less in the very near term when the Federal Reserve is taking more significant steps on stemming inflation. The axiom of not fighting the Fed in the near term once again rings true. With the rate of M2 money supply growth having decelerated from over 25% to a present rate of 5%, however, there is a good likelihood that inflation will be lower by mid-2023. As stocks are a forward-discounting mechanism, their prices could very well react to this development sooner.

One last exhibit we have provided in past notes that is especially relevant today. The following table shows the outcome of buying right before a major market sell-off, alongside the ensuing 5-year result. We choose five years to find the right equilibrium between the short and long-term. The results suggest that in periods of a weaker economy and disappointing investment news, the longer-term resiliency of U.S. companies to create shareholder value prevails.

S&P 500 Index vs. T-Bill Returns

Purchased Just Prior to Market Declines

  Purchased 10/16/1987 (Pre-Market Crash) Cumulative 5-Yr Purchased 9/7/2001 (Pre-9/11) Cumulative 5-Yr Purchased 9/12/2008 (Pre-Crisis and Lehman Bankruptcy) Cumulative 5-Yr Purchased 2/19/2020 (Pre-COVID to date) Cumulative
S&P 500 Index +72.8% +30.0% +50.3% +15.6%
3-Month U.S. T-Bill Index +41.5% +12.0% +1.0% +1.1%

Source: Bloomberg, as of 09/22/2022

Please do not hesitate to reach out to your Ancora team with any specific questions or to arrange a meeting to discuss your portfolio.

View All >