Unfortunately, the temperature outside is about the only thing that’s hot this summer. We know there’s not much heat coming from financial markets with the S&P 500 turning in its worst first half since 1970. That’s enough to make you want to find a swimming pool and leave it all behind.
And there’s no fault in that, but remember that markets can’t go up forever, and after the post-COVID spending spree of last year, the market may have been due for some dark clouds.
But rain eventually ends, blue skies return, and history tells us financial markets recover. So, enjoy your day in the sun because there are things you can do to make that blue sky even brighter when clouds finally clear.
Here are some silver linings to think about. With the market now in bear territory, the risk to earnings outlook for both stocks and bonds is more balanced than it was when bulls were in command.
Today’s earnings multiple is now below average, leaving the market cheaper than it used to be, and there’s a case for optimism in bonds as well. After more than a decade of ultra-low interest rates, the Fed’s efforts to bring down inflation have pushed interest rates up, which correlates well with higher bond returns over the long run. There are still risks associated with protracted inflation and economic recession, but even with those considerations, the bond market is more attractive than it’s been in years.
So, even though markets are down, we can still make the most of the situation. If we have cash that’s been on the sidelines, we can invest it at more attractive valuations. We can also use these favorable market conditions to rebalance portfolios, and we can reduce our capital gains tax liabilities by selling underperforming investments. That is called tax-loss harvesting. Tax rates are historically low, so this also may be a good time to convert your traditional IRA account into a Roth IRA.
But this is the time to be careful because bear markets can sometimes scare us into making costly mistakes. Watching portfolio values decline is stressful, and studies suggest we can feel twice as much pain from a decline than pleasure from an increase.
So, in times like these, resist the urge to sell because those who bail out of the market are likely selling to buyers who have long-term, patient approaches to investing, and history shows that markets reward those with the courage to buy during bear markets.
Just keep in mind that storms aren’t always as bad as they appear, and despite the dismal performance of stocks year-to-date, the S&P 500 has still returned more than 10% a year over the last three-, five-, and 10-year periods. And while it may feel like the market has given up many years’ worth of returns, the S&P 500 currently sits at the same level as it did in March of last year.
So, enjoy the pool and the cool water because the summer is likely to get even hotter. And rest assured that your investment prospects aren’t as cold as they might seem.