A Study in Contrasts

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

There are only four more trading days left in the year and historically they are lightly traded with a slight upward bias. Last Wednesday morning we saw the DJIA jump 585 points, or +1.8%, higher in just 90 minutes, then trade quiet and flat the rest of the day. Interesting. On Thursday morning the DJIA traded down 431 points, or -1.5%, in 30 minutes, went flat and quiet for 90 minutes, then dropped another 360 points, or -1%, in 90 minutes before rallying 459 points, or +1.5%, into the close. This was just Wednesday and Thursday. For the week, the DJIA traveled up and down a total of over 4000 points to finish up just 282 points, or +0.8%, higher. So much for a quiet trading sequence going into the Holidays!

2022 is a year that we are going to be glad to put behind us. U.S. and international equities are in Bear Markets, yet their declines have been rather restrained, in sharp contrast to the extreme volatility that we experienced last week. It was as if equity markets slipped below the horizon, like a November sunset, without a lot of fuss or bother. Yet the numbers year-to-date are decidedly negative. The large cap S&P 500 Index is down -18.02%, and the small cap Russell 2000 Index is down -20.50%. Both indexes were markedly lower as recently as mid-October. The long-term trends for U.S. and internationals equities remain down.

December has also been lower thus far, with the S&P 500 Index falling -5.66%, and the Russell 2000 Index down -6.57%. There was quite a robust rally from the October lows through November. A certain amount of pullback would be expected, except for how things are falling into the calendar cycle. November through January are historically the most rewarding consecutive three months of the year. The S&P 500 Index is down -2.18% since the first of November. That’s not an impossible number to recover, especially given the market volatility seen last week, but it remains rather foreboding.

Market sector performance also gives us another look at the contrasts seen in equity markets.  Year to date the sharpest contrast in performance is seen when looking at the Energy versus Internet sectors. The S&P Composite Energy Sector Index is up +62.98% YTD, while the Dow Jones Internet Composite Index is down -46.72% YTD. Portfolio performance can easily be attributed to relative exposure in just these two sectors. Another dramatic contrast is the S&P Consumer Staples Sector Index up +0.13% YTD versus the S&P Discretionary Sector Index down -35.56% YTD. The Dow Jones Utilities Average is up +2.43% while the Dow Jones US Real Estate Index is down -24.89%. These numbers are essentially mirrored in December’s performance.

Bond market performance in December gives us another contrast versus year to date numbers. U.S. and international bonds have been in Bear Markets since September of 2021. One of the conundrums of 2022 investing was that bond market performance was actually worse than equity market performance. This cut off the natural rotation to bonds that would normally have accompanied the stock market decline. YTD numbers tell the story with Bloomberg’s US Aggregate Bond Index down -12.44%, the US Corporate High Yield Bond Index down -10.35%, the Municipal Bond Index down -8.28% and the Global Aggregate Bond Index down -15.97%. The contrast is that all of these Bloomberg bond indexes are higher in December. The US      Aggregate Bond Index is up +0.20%, the US Corporate High Yield Bond Index is up +0.31%, the Municipal Bond Index is up +0.55%, and the Global Aggregate Index is up +0.88%.   

Gravitating away from the worst and towards the best sounds like common sense, but it is actually complicated when applied to financial situations. Studying contrasts in volatility and performance data provides us with valuable information when applied to asset allocations models.  This can be especially useful in detecting major market reversals. We look forward to the challenges and opportunities 2023 may hold for us.

Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.

© 2022 Edward D. Foy.   [email protected], www.foyfinancial.com

Sources: StockCharts, Morningstar, Stock Trader’s Almanac 2022.