Is this chart going up or down? It’s not a trick question. Just look at it and tell me what the primary trend is.
You’d be amazed at how many financial advisors, insurance brokers acting as financial advisors, financial planners, wirehouse wealth managers, financial consultants and other assorted intermediaries in this business could not for the life of them look at this chart and give you a straight answer. Some would say it’s just run of the mill volatility. Some would suggest you pull back the chart further for more context. There would be all sorts of responses on a spectrum between rationally calm and outrageously disingenuous. But almost none of them would be able to utter the words “Down. That chart is going down.”
Because to say so would make the job of taking care of you more difficult.
In the chart above, you’re looking at weekly closing prices for the Nasdaq 100 ETF (QQQ). The blue line is the 40-week moving average (40 weeks being roughly equivalent to the more popular 200-day or 10-month moving averages).
A few things should stand out to you. The first is that the Nasdaq 100 has failed at the 40-week moving average twice after significant rallies this year. It happened once in the spring and once in the last few days. The first failure led to much lower prices shortly after. The jury’s still out on this episode.
The second thing you should notice is that this is the most extended period of time the QQQ’s have spent below the 40-week moving average in five years. I went back ten years just for fun – we have not spent 7 months below the 40-week in this index for over a decade.
To say we’re in a completely different market environment would be an understatement. There’s been no sustainable V-shaped recovery. The cavalry is not riding to the rescue this time. The Fed wants lower prices, lower valuations, more subdued economic activity and less enthusiasm for risk-taking if its efforts to tame inflation are going to work. The Nasdaq is basically ground zero for these attempts and you can see this on the chart above. The Nasdaq is the Fed’s voodoo doll, every rate hike another pin.
And, categorically, indisputably, that Nasdaq chart is in a downtrend. I take no pleasure in declaring this and I hope it ends tomorrow – but until it does, this is the simple truth of the matter.
As I explained in April, when the S&P 500 index broke below its 200-day moving average to end the month of March, it’s less complicated than you think. When stocks break their uptrends and settle into statistical downtrends, the prevalence of high-volatility days (in both directions) becomes amplified.
What’s the significance of a clear downtrend for the S&P 500 and a monthly finish below this simple moving average? Well, higher volatility – in both directions – is going to become the new normal. We ran the numbers. The fifty best and worst one-day returns for the S&P 500 in stock market history – 47 of those 50 best and worst days have happened while the S&P 500 was below the 200-day.
This is where the drama takes place.
The drama continues. For younger investors with small account balances and a lifetime of dollar cost averaging ahead of them, the drama works in their favor. Our favor (I consider myself in this cohort still, don’t judge me).
For older, wealthier investors, it’s not the same situation. Fluctuating account values heighten the anxiety and make sticking with a strategic asset allocation more difficult than normal. When it’s a seven- or eight-figure portfolio swinging around by 3 or 4 percent each week, the dollar figures of these short-term gains and drawdowns can become terrifying.
So what do you do, as an investor with a lifetime’s worth of savings already in the market, once you’ve identified the fact that we’re in an obvious downtrend?
It’s probably too late to do much of anything, unfortunately. Other than to start preparing for the next time. “I’m not going through this again…” is a powerful motivator in investing and in life. Use it.
Preparing for the next bear market (as opposed to reacting to the current one) can be accomplished by asking yourself the following:
- Who is managing my money currently? Is it me, all alone? Am I enjoying this? Do I have help? Do the people helping me actually have any answers for a market environment like this? Are they oblivious to it? Would they be able to explain my allocation to my wife / husband / children should something happen to me?
- Is “fully invested at all times no matter what” appropriate for someone at my age and asset level? Have I gotten past the point where I can accept the full brunt of what the investment markets can do to my savings? Has my allocation / portfolio strategy evolved given where I have now gotten to in life?
- Are there any conditions under which I might make an asset allocation shift in my portfolio? What are those conditions? Are they rules-based or am I relying on my own instincts or emotions to make changes? Do I have any rhyme or reason for the things I am invested in or the moves I sometimes decide to make? Is my decision-making based on anything empirical? Is it consistently applied across asset classes and time frames?
- What are the tax ramifications of the things I am doing in my portfolio? What effect will my brokerage account activity have on the expected returns need to achieve my plan’s goals? What happens when I do something that turns out to have been a mistake? What is the framework for being able to identify something as having been a mistake so I can reverse it? Do I have anyone to talk to? Do the people I talk to have solutions or do they just repeat mantras like “Stay the course.”?
You might have great answers to these questions. You may feel that having taken this mental inventory of your current situation, you are more than ready for the next prolonged downtrend, whenever it should occur.
Or perhaps not.
It’s possible that you’ve been white-knuckling things on your own for way too long. It might be that you’re in an accidental relationship with an inadequate advisor because they charmed you at a golf outing or they met you early in your investing career, when things were simpler and you were just focused on making VP or putting the kids through college. Maybe you were handed off from one advisor to the next to the next at a major bank and you just haven’t gotten around to questioning whether or not they even know what they’re doing. Maybe the downtrend of this year is the wake-up call you’ve been waiting for to finally do something proactive about your portfolio management.
If this is the case, and you plan to address the questions asked above, then the storm clouds of 2022 will turn out to have had a silver lining. If we don’t push ourselves and endure hardships, we don’t grow. When the current bear market ends – and it will – where will you be then? Hopefully, focused on preparing to survive the next one.