Is the Bottom In?

In the face of this horrible year with the S&P 500 (IVV) currently down -14.30%, we have had some decent mini-rallies.  For example, from March 14 through March 29 we saw the S&P 500 go up +11% and from June 16 through August 18 it went up +17% (see chart below).  We are seeing another mini-rally now with the S&P 500 currently up +13% from a recent low on October 12.  So, is the bottom IN and will this rally take us to new highs or is this another rally to be short-circuited by any of the troubles facing the markets?

I read an interesting article this weekend published by Wellington Management, a multi-billion dollar global investment manager based in Boston, titled Inflation, rates, and volatility: The best defense is a good offense.  Aside from the title, the gist of the article deals with the large number of binary events we are facing that will dictate the course of the global economy.  Several of them are summarized below:

  • Hawkish centrals banks fighting inflation

  • Higher rates, tighter liquidity, and weaker financial conditions suggesting downside risk to earnings and potential for severe recession

  • Unattractive credit spreads

  • Currency-induced sovereign crisis

  • Escalation in Russia/Ukraine conflict

All we need to do is switch the “negative” tone to a “positive” tone in a few of those bullets to see a turnaround in the market outlooks.  The article implies that the potential for market dislocations from these major items could cause a need to act swiftly with some tactical repositioning.

Though D&A has a strong philosophical bias to focus on long term strategic positioning, there are opportunities to act tactically. For example, earlier this year, D&A made a commitment to shorten bond duration for all client accounts given the risk/return profile displayed by the flat yield curve (long bonds compared to shorter bonds) (see recent blog posts, including It’s Complicated, and others). In other ways, for taxable accounts, given the large market drawdown this year, there is a potential for advantageous tax loss selling. We will continue to monitor market dynamics and adjust portfolio positions to advantage all client accounts.