Equity and bond markets sold off since August. You’re not surprised are you? You anticipated this could happen, didn’t you?
Volatility in equity, bond, commodity, currency and other markets should be expected. This is especially the case in publicly-traded markets when millions of people and trillions of dollars can move in and out of the market in milliseconds.
Equity Markets
In my note on August 1st, I indicated that equity markets (S&P 500, etc.) were close to prior peaks, and we may struggle a bit as investors may need a better, stronger reason move higher, otherwise there could be risk to the downside, with potential support at the 50-week/200-week moving averages. This was based on simple, short-term technical analysis with resistance and support levels. A strategy investors may have considered at that time was simple rebalancing, particularly after the quick rally in equity markets from the lows back in October last year.
Well, the equity markets have declined from those peaks in August. Looking at the S&P 500, the index has now declined to the 50-week and started to bounce. If we stick to a potential selloff level at the 50-week/200-week levels, we may only be halfway through a decline, if we get to the 200-week moving average. Back in August, if you set your expectations that market volatility could pick up and sell off from the prior higher levels, you wouldn’t be surprised that the markets are where they are right now: lower.
So now what? Should you wait and hope for the equity to decline further if you’re a long-term investor with capital to invest? Are you confident that equities decline to lower levels? What if they don’t? What if the markets rally higher from here? Then what?
The goal should be to try to stay disciplined and not let emotions drive your investment decisions. Have a strategy when the market gives you something to take action. If you dollar cost average, then maybe you put more capital to work in deeper market selloffs and less after big rallies. If the market doesn’t give you an opportunity to make a significant move, then maybe you don’t have to do anything and stick to your disciplined long-term strategy. Try to figure out a strategy that makes sense to you so that emotions don’t take over when volatility picks up, which it often tends to do.
Source: Stockcharts.com 10/9/23
Bond Markets
In my note on August 3rd, I indicated that bond yields have some fundamental reason to keep moving higher. I indicated that the 10-year Treasury could move higher to the 5% level if it could break through the 4.5% level. The 10-year Treasury has quickly moved higher, and interest rate sensitive bond prices have declined as anticipated.
If you’re old enough, you may remember interest rates much higher back in the 1970s/1980s than they are now. Can interest rates get back to those levels. Maybe. Interest rates are often driven by inflation expectations. It may be tough for inflation to get much higher than it is today and the economy may not have enough juice to generate significant high levels of growth, so the fundamentals for very high interest rates might not be there. Can interest rates on the 10-year Treasury bond jump over the blue line in the graph below, just based on traders and their resistance levels being broken to the upside? Yep.
You need to figure out if you believe interest rates will stay at these levels forever, or will be higher or lower in the future. With bonds, as long as they don’t default (or are called, or other certain events don’t occur), you’ll generally get the stated interest income plus the value at maturity. So today, if you buy a 10-year Treasury, you could get income generation of over 4.7% for 10 years. Add some credit risk (corporate bonds, etc.) and you might be able to get over 6%. Much better income generation than the recent past.
Can you try to time the “peak” of interest rates? Sure. What if you’re right? What if your wrong? You’ll have an emotional reaction if your wrong, so try to implement a strategy to reduce your emotions. That could include dollar cost averaging your bond investments as well. You won’t get it perfect, but you will be invested.
Source: Tradingview.com 10/9/23
Can equity and bond markets decline further? Sure. Can equity and bonds rally from here or just chop around for awhile? Sure. Investors should just be aware that anything can happen at any time. Consider reacting to the markets rather than trying to predict the markets. Consider focusing on the long-term, not the short-term noise. Anticipate volatility, don’t make emotional decisions because of it. If equities and bond markets decline over the short-term for short-term reasons and you’re a long-term investor, take advantage.