For those who are waiting to get back into the market...

[Freedom56]

For those waiting to get into the market, continue to wait. 90% of all stocks in the S&P500 have fallen in 5 of the last 7 days. This has never happened before, ever. This is an unprecented amount of selling yet the market has not really even declined. I would think somewhere between 1500 and 2000 on the S&P500 would be a good place to start if you are out. If you are complelled to get in divide the amount of money you want to put in by 730 and put that much in every day for the next two years.

Back in March 2020, I was telling people to buy investment grade preferred stocks after they were battered down to levels where their yields were 9-11% and YTC at 35-40%, you stated that preferred stocks should be avoided until they dropped another 50%. Well that didn't happen and in fact those that bought not only earned 9-11 percent yields plus also 90-110% capital gains. I don't buy equities but barring a nuclear war, the S&P will have pretty strong support at the 2900 and then 2400 levels where the trailing PE multiples will be in line with bear markets of the past.

 

[Running_Man]

You expect a ~65% decline then in total on the S&P 500, which would place the Nasdaq and Russell 2k down 80-85% from highs? Seems highly unlikely. You'd be looking at a dividend yield of 4% in the S&P 500 at that point and they would be trading at roughly 7x earnings. Would be a once in a generational buying opportunity - would be the second worst decline in history behind the great depression if that happens - but I wouldn't hold my breath waiting for those price points.

The Fed since 1987 has been a defender of the stock market and reversed course with every stock market decline. Yesterday markets felt the very first time the FED has confirmed it is worried about inflation far more than it is a stock market decline and willing to not worry about the stock market. If you have a 40 year period of time where interest rates declines and by definition the discounted cash value of earnings increases and it ends, the idea that this will be a few month correction in the stock market averages and we will be back at all time highs by 2023 because it has always been that way for my life is highly optimistic.

My thoughts are not for anyone that maintains a ratio of stocks as a percentage of their total holdings. Anyone that does that is better served to stick to their allocation. But people who are waiting to add money by definition are more nervous and far more likely to sell when the pain of S&P500 2000 level hits, instead of being ready to buy. That still may be way too early. By 2009 13 years of gains in the S&P500 were reversed, and the FED was hardly trying to raise rates, they only made minor moves.

Commodity prices are making a major move up, labor is in very short supply, and interest rate costs are about to actually become a thing for most corporations for the first time in most CFO's in the S&P500's life. Mortgages have doubled in cost.

So the idea that this is all sorted out already for a nervous type of investor is not how I would look at it. Average investor believes as most here do you never sell, that will start to change when S&P500 hits 2000, in my opinion.

 

[daylatedollarshort]

I don't know enough to call the exact bottom, but we have significantly negative real interest rates right now. If the Fed stays serious about inflation, they are going to really have to increase interest rates to the point where fixed income becomes more and more attractive, which will pull investor money out of the stock market, which recently had been the only game in town. So I think this one is going to be a big drop, unless the Fed chickens out and decides to live with higher inflation.

 

[Koolau]

So I think this one is going to be a big drop, unless the Fed chickens out and decides to live with higher inflation.

My bet is on the latter. I don't think the FED has the stomach for the ride they may be precipitating. I think THEY will be the "capitulators" when the economy continues its southward trek. Just achieving a significant drop in inflation will be enough for the FED to declare victory. Folks will welcome 5% inflation when they've been experiencing 10%. No guts - no glory, but the FED isn't into glory and certain has not shown a lot of guts these past several months - but that's just my opinion. I only have 1 course of macho and one course of micro under my belt - all the way back when a computer was a massive box in a room. YMMV

 

[milford]

For those waiting to get into the market, continue to wait. 90% of all stocks in the S&P500 have fallen in 5 of the last 7 days. This has never happened before, ever. This is an unprecented amount of selling yet the market has not really even declined. I would think somewhere between 1500 and 2000 on the S&P500 would be a good place to start if you are out. If you are complelled to get in divide the amount of money you want to put in by 730 and put that much in every day for the next two years.

That would be a 60% overall drop. 40% more than where we are at right now. Average bear is 35% down. A recession takes 30% out of the market on average. If you wait for those numbers you quoted, you may miss a whole lot.

The thing is 2021 was an outlier year fueled by stimulus growth so using that as a baseline as an all time high is a bit generous in my opinion. Bear in mind the market was already positioned for a possible correction or even bear market at the start of 2020 and currently we're not even back to the all-time high of 2020. Although I am not as bearish as 1500, I do believe that is a possibility given the current conditions (continuing inflation concerns, hawkish feds, gas prices still on the rise) and often times we over correct as its impossible for a "soft landing". My best guess is that somewhere between 2000-2500 will be the bottom.

 

[aja8888]

It's pretty obvious that several of the FED governors have sold there portfolios out as two left under duress (no criminal charges yet, though). The FED has also indicated that inflation is the problem they will go after to protect the dollar and the reserve status of the currency.

My feeling is that there is much more pain to come. Meme stocks have been literally killed and many are down 90% with BK staring them in the face. One electric car company filed Chapter 7 earlier this week.

This stock market bloodbath will continue through the summer, at least.

 

[milford]

My bet is on the latter. I don't think the FED has the stomach for the ride they may be precipitating. I think THEY will be the "capitulators" when the economy continues its southward trek. Just achieving a significant drop in inflation will be enough for the FED to declare victory. Folks will welcome 5% inflation when they've been experiencing 10%. No guts - no glory, but the FED isn't into glory and certain has not shown a lot of guts these past several months - but that's just my opinion. I only have 1 course of macho and one course of micro under my belt - all the way back when a computer was a massive box in a room. YMMV

Although the Fed is known for chickening out to appease the market when it starts to wobble, I will go out on the limb and say this time is different.

1) High inflation affects everyone, a recession only directly affects a subset of the population (i.e. certain sectors get hammered more vs others)
2) Imagine if the Feds declared victory over inflation at say 4-5% and it creeps up to 8% again. This would totally destroy any creditability left with the Feds. Fool me once shame on you, fool me twice shame on me.
3) Nobody wants to be the "bad guy" in stopping the good times of the market, however Powell knows he has no choice given the current conditions. He could be known as the modern day Volcker who came in and squashed big bad inflation or a failure in unable to tame inflation.

So sit tight and buckle up as we're headed towards money tightening policies for a while.

 

[Magus]

The Fed since 1987 has been a defender of the stock market and reversed course with every stock market decline. Yesterday markets felt the very first time the FED has confirmed it is worried about inflation far more than it is a stock market decline and willing to not worry about the stock market. If you have a 40 year period of time where interest rates declines and by definition the discounted cash value of earnings increases and it ends, the idea that this will be a few month correction in the stock market averages and we will be back at all time highs by 2023 because it has always been that way for my life is highly optimistic.

My thoughts are not for anyone that maintains a ratio of stocks as a percentage of their total holdings. Anyone that does that is better served to stick to their allocation. But people who are waiting to add money by definition are more nervous and far more likely to sell when the pain of S&P500 2000 level hits, instead of being ready to buy. That still may be way too early. By 2009 13 years of gains in the S&P500 were reversed, and the FED was hardly trying to raise rates, they only made minor moves.

Commodity prices are making a major move up, labor is in very short supply, and interest rate costs are about to actually become a thing for most corporations for the first time in most CFO's in the S&P500's life. Mortgages have doubled in cost.

So the idea that this is all sorted out already for a nervous type of investor is not how I would look at it. Average investor believes as most here do you never sell, that will start to change when S&P500 hits 2000, in my opinion.

The data I gave is for ALL TIME not since 1987. You really expect the second worst drop in S&P in US history and a 4%+ dividend yield (and 7%+ on dividendy stocks)? People will back up the truck long before that. The only way we get to that kind of scenario is major deflation / depression and the Fed will reverse course long before we see that. You are talking about a scenario with US bonds at 7-8% and mortgages north of 10%. Have you done the math on government interest expense at 7-8%? Interest would be well over half our current spend. They'd have to have massive, massive entitlement cuts, huge job losses, banks going under, etc. As much as they may not like inflation, they hate that stuff even more. They don't have the freedom to raise rates as high as Volker when US gov debt to GDP was 30% and today its 130%.

 

[milford]

The data I gave is for ALL TIME not since 1987. You really expect the second worst drop in S&P in US history and a 4%+ dividend yield (and 7%+ on dividendy stocks)? People will back up the truck long before that. The only way we get to that kind of scenario is major deflation / depression and the Fed will reverse course long before we see that. You are talking about a scenario with US bonds at 7-8% and mortgages north of 10%. Have you done the math on government interest expense at 7-8%? Interest would be well over half our current spend. They'd have to have massive, massive entitlement cuts, huge job losses, banks going under, etc. As much as they may not like inflation, they hate that stuff even more. They don't have the freedom to raise rates as high as Volker when US gov debt to GDP was 30% and today its 130%.

I had similar train of thought as you in that the Fed may be limited in its ability in raising interest due to its high GDP to debt ratio already, however I raised that question to a professor of econ in a webcast that he recently did and his take was that it would only be a big issue for the government if the rate stayed high for long term. He mentioned a good portion of government debt is fixed long term (i.e. 3 years or greater) and even in the short term if the rates doubled/triple its still a drop in the bucket of the overall budget of nearly 6 trillion dollars now. Would love to hear your take on his thoughts.

 

[Magus]

I had similar train of thought as you in that the Fed may be limited in its ability in raising interest due to its high GDP to debt ratio already, however I raised that question to a professor of econ in a webcast that he recently did and his take was that it would only be a big issue for the government if the rate stayed high for long term. He mentioned a good portion of government debt is fixed long term (i.e. 3 years or greater) and even in the short term if the rates doubled/triple its still a drop in the bucket of the overall budget of nearly 6 trillion dollars now. Would love to hear your take on his thoughts.

For a very short period of time (few months) perhaps but it would not take long term. About 20% of existing debt is rolled every year plus the debt itself doubles every 8 years with all that new debt obviously at the higher rate. And in a recession, government spending increases as people collect more benefits. The effect would be even with 2 years at much higher rates than 2021 would add a massive amount of interest cost - probably an extra $1T a year for the scenario we are talking about and closer to $2T+ within 4. And that assumes you can lower it again a lot - you may not - it took a decade to get back to pre Volker rates after peaking.

A lot of economists were asking why the government wasn’t issuing more long bonds in 2020 and 2021 to limit that risk but the rumor is most of those in the treasury department thought negative rates like Europe were more likely than going up, hence the limited long bond issuance.

 

[mistermike40]

mistermike40--
You say you don't need your money now and you are sleeping better since moving to 10/90. Why would you want to change that? What was the reason why you changed in the first place?
Plan a comfortable Asset Allocation and rebalance yearly.

Usually I'm fine at 60/40... I can live with the risk, and enjoy seeing my retirement fund outperform inflation (at the very least). I changed AA because I sensed there was/is almost a perfect storm of events that could cause the market to collapse. I wasn't trying to make money per se, I was just trying to protect assets.

Like most of us, I've worked very hard for my money... I guess old habits die hard, I'm still protective of it

 

[mistermike40]

For those waiting to get into the market, continue to wait. 90% of all stocks in the S&P500 have fallen in 5 of the last 7 days. This has never happened before, ever. This is an unprecented amount of selling yet the market has not really even declined. I would think somewhere between 1500 and 2000 on the S&P500 would be a good place to start if you are out. If you are complelled to get in divide the amount of money you want to put in by 730 and put that much in every day for the next two years.

That seems like a very large market correction, but your suggestion is interesting.

 

[travelover]

......... I changed AA because I sensed there was/is almost a perfect storm of events that could cause the market to collapse..........

You seem to have a unique power. Can you let us know when to get back in?

 

[copyright1997reloaded]

I had similar train of thought as you in that the Fed may be limited in its ability in raising interest due to its high GDP to debt ratio already, however I raised that question to a professor of econ in a webcast that he recently did and his take was that it would only be a big issue for the government if the rate stayed high for long term. He mentioned a good portion of government debt is fixed long term (i.e. 3 years or greater) and even in the short term if the rates doubled/triple its still a drop in the bucket of the overall budget of nearly 6 trillion dollars now. Would love to hear your take on his thoughts.

As of 6/30/20 the average duration of Treasuries was 62 months.
Source: https://data.nasdaq.com/data/USTREASURY/AVMAT-average-maturity-of-total-outstanding-treasury-marketable-securities

If anyone could provide a better/updated to current source it would be greatly appreciated!

It is also important to remember w/a large deficit the debt is increasing and thus even with constant rates the interest payments are increasing.

 

[MarieIG]

Usually I'm fine at 60/40... I can live with the risk, and enjoy seeing my retirement fund outperform inflation (at the very least). I changed AA because I sensed there was/is almost a perfect storm of events that could cause the market to collapse. I wasn't trying to make money per se, I was just trying to protect assets.

Like most of us, I've worked very hard for my money... I guess old habits die hard, I'm still protective of it

Seems you have better timing that most, certainly better than me! No, I didn't get out, but had/have a large cash position.

I nibble a little, tiny bit with limit orders. I aim low and some were executed. My thoughts on buying in any type of bulk would be about 40-45 percent down from peak to trough with a broad based EFT, i.e. VT or VTI. This does not even have to be done all at the same level. You can schedule your limit orders, for example 5 to 10% apart. But, this is not carved in stone, and a limit order can be changed as circumstances warrant.

 

[yakers]

If you are complelled to get in divide the amount of money you want to put in by 730 and put that much in every day for the next two years.

Sort of along these lines, I have a stable value type fund (Federal TSP G Fund) and I have put on the calendar to transfer each month 1% to the C Fund (S&P500) and 1% to the L fund (income fund). Very slow DCA starting now.

 

[Out of Steam]

As of 6/30/20 the average duration of Treasuries was 62 months.

Not having pushed the average duration out while interest rates were low seems like a lost opportunity, though there may have been macroeconomic effects they perceived as being negative - like raising mortgage rates.

 

[Running_Man]

So this is a chart of every year since 1926 YTD performance of S&P500. Will be interesting to me

 

[GenXguy]

Will be interesting to me

It's already interesting to me. But it will be even more interesting to see where it goes from here.

 

[Out of Steam]

I've been keeping a fairly low stock allocation since 2020, but don't want that percentage to fall further. Plan to do a second rebalancing (a small buy of index funds) in the next few days.

Made a transfer of about 50% of what it would take to rebalance (at 40/60 stock) just now. May do the rest early next month.

 

[Out of Steam]

I don't know enough to call the exact bottom, but we have significantly negative real interest rates right now. If the Fed stays serious about inflation, they are going to really have to increase interest rates to the point where fixed income becomes more and more attractive, which will pull investor money out of the stock market, which recently had been the only game in town. So I think this one is going to be a big drop, unless the Fed chickens out and decides to live with higher inflation.

In the other direction, current debt levels of the Federal Government provide a huge incentive not to let interest rates get too high.

 

[copyright1997reloaded]

In the other direction, current debt levels of the Federal Government provide a huge incentive not to let interest rates get too high.

This.

Part of my thesis on why the Fed will ultimately need to pivot sooner rather than later.

ETA: And why I am 50% equities instead of 25%.

 

[Out of Steam]

This.

Part of my thesis on why the Fed will ultimately need to pivot sooner rather than later.

ETA: And why I am 50% equities instead of 25%.

The compulsion of the Fed and Treasury to tinker with the economy shows more faith in economic expertise than I think it deserves.

Even as we enter the bear market, I'm still comfortable with our 40% stock target.

 

[milford]

In the other direction, current debt levels of the Federal Government provide a huge incentive not to let interest rates get too high.

However, I think the Fed is prepared to squash inflation at all cost this time around and historically the Fed's fund rate has to be above the inflation rate to tame inflation. Keep in mind the Fed's mandate is for maximum employment and price stability so accumulating massive debt isn't one of their main concerns, it would be up to Congress to solve that issue. If anything, it is Congress who contributed in putting the Fed's up against the wall with all the free money past couple years (3 stimulus checks, SBA loans, extended/additional unemployment benefits, etc...).

 

[daylatedollarshort]

However, I think the Fed is prepared to squash inflation at all cost this time around and historically the Fed's fund rate has to be above the inflation rate to tame inflation.

That is what I would bet on. Much higher interest rates, at least until inflation subsides, and no soft landing. Has inflation ever been solved with significantly negative real yields in the past?