The 7th Inning Stretch…
By Zachary Harrington
As a child of the 90’s I grew up loving baseball, specifically the New York Yankees. I have vivid childhood memories of trying to mimic Andy Pettitte’s left-handed delivery as I chuck tennis balls to my brother in my parents back yard. I remember Yankees moments like they were yesterday; George W. Bush throwing the first pitch of game three of the Subway Series, Aaron Boone’s walk-off homerun in game 7 of the 2003 ALCS, and to this very day anytime I hear “Enter Sandman” I envision Mariano Rivera entering the game from the bullpen. I LOVED baseball growing up. But as time passed and technology engulfed our lives, like many, I found the pace to be slow and boring. In this day and age of Instagram, TikTok, and short attention spans, how could I possibly sit patiently for 9 innings when I get dopamine hits 10 seconds at a time on my phone.
This baseball season has once again sucked me back into the game and as I sat at home watching the Yankees play the Guardians during the ALDS, I began to find myself drift away from the game, distracted by the noises – a text message, email, or noise in the background – until I arrived at the 7th inning stretch. Growing up I never understood the 7th inning stretch, I felt it was an oddly placed tradition where fans sang take me out to the ball game and ran to the bathroom. I now view it differently; It is a pause in the action, an opportunity to recenter and a chance to take a look at the big picture, a chance to appreciate all that has happened and look forward to the ending. One of my other joys in life are capital markets and 2022 has certainly been a challenging one; a year of Bear Markets, economic uncertainty, geopolitical risk, and years of wealth washed away. As we sit here in October, I think we can look at this moment as the 7th inning stretch for this Bear Market and look at the opportunities that this market has created.
When looking at a Bear Market it is important to look at some historical context; what is a bear market? How long do they tend to last? And what does it mean for equity performance?
- Since the Great Depression there have been 25 Bear Markets in the S&P 500, 2022 being the 26th.
- 14 of these Bears led to a Recession, 11 were Bear Market corrections without an economic recession.
- Bear Markets are defined as a greater then 20% drawdown in an index and is measured back to the last time it hit an all time high.
- Average Drawdown for a bear market is between 26.1% and 39.4% depending on if it leads to a recession or not.
- Average peak to bottom lasts anywhere from 202 days (non-Recession) or 390 days (recession)
So, with this background information in mind, where does the 2022 Bear Market stand through 10/17/2022 at the open:
- 287 Days since last market high2
- S&P 500 Peak to trough: ~-27.6%2
When looking at this Bear Market compared to others, it seems to be pointing towards the recessionary side of the equation both based on drawdown, duration in days, and overall economic slowdown as measured by GDP contraction.
What has made this Bear Market even more challenging has been the bond market volatility, at the open on October 17th, 2022, the aggregate bond index was down ~17% YTD3. This type of pricing pullback has rarely ever happened in the bond market, and it is being driven by the Federal Reserve’s missteps relative to inflation and easy money policies throughout the pandemic driving insatiable consumer demand. This has created a nightmare scenario for diversified investors – you expect your bonds to be a ballast in your portfolio and if you kept duration long, they were anything but a ballast. Below you will see a visual outlining the pain felt by diversified investors through August.
The most important note to take away from this chart is the opportunity that Bear Markets create. The months and years following a Bear Market drawdown are some of the best return opportunities for investors who are allocated appropriately for the long run.
So, looking at the last couple of innings of 2022, what are some actionable items investors should look to do?
- Rebalance portfolios – Investors who have yet to rebalance in 2022 are likely underweight in their stock exposure. Review your current asset allocation relative to your target allocation and make sure they are aligned.
- Increase Bond duration – If you are a diversified investor who has shorter duration bond exposure, now is an excellent time to add duration to your bond portfolio.
- Tax loss harvesting – You can sell depreciated assets in your brokerage accounts as a loss. Completing these sales affords you to offset other gains, carry forward loss into future year and deduct a portion against your current year income.
- Maximize retirement plan savings opportunities – maximizing your retirement accounts in the 4th quarter of 2022 will provide you with relatively low-cost basis on stock and bond positions and opportunity for outperformance over the next 5-10 years
Take this opportunity to reset, appreciate the Bull Market from 2010-2022, maximize the planning opportunities in front of you, and be patient as markets re-gain footing and their upward trajectory.
- Josh Brown - Ritholtz Wealth Management Tweet 6/15/2022.
- Liftoff Invest: Data Source – S&P 500 Bloomberg Barclays US Aggregate Bond index
Advisory services offered through Rise Advisors, LLC (“Rise”), a Registered Investment Adviser. This report is being generated as a courtesy and is for informational purposes only.