No “V” Recovery This Time

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

April has been unkind thus far. After a remarkable rally the last two weeks of March, the S&P 500 Index has given back roughly half of that advance. It is now once again under the 50-day and the 150-day moving averages, which diminishes their importance as either useful support or resistance. There are still a number of positives in the charts, most notably the potential formation of a bullish reverse head-and-shoulders, but the bottom line is that this time the correction will not be the “V” recovery that we have been spoiled with for the past couple of years. Equity markets need more time, which is just fine.

The primary news stories affecting markets remain the same. Rising interest rates and inflation are still topping the charts on the economic side, while the human tragedy in Ukraine continues to sadden us. It is hard to equate higher gas prices with the destruction of entire cities and the dislocation of millions of women and children, especially in these ‘modern’ times, but here we are. What happened in the 60’s and 70’s should stay in the 60’s and 70’s.

The exceptions to the major market indexes’ trading ranges are energy and commodities. From an investment perspective, there are challenges. After their significant price increases already this year, how does an investor determine a good entry point? Is it still early in this story and this cycle or is it too late? Historically,   inflation pressure has been very difficult to reverse or even slow down. The Federal Reserve has finally started taking steps, but as usual they are very late to the game and the impact of their response will appear muted for at least the first couple of years. As for energy prices, President Biden is discussing reversing policy and reopening government lands and offshore leases for additional drilling. But that’s not going to drop the price at the pump immediately. 

This information would support continued investment in both energy and commodities and, unfortunately, higher prices at the pump. This is quite a shift in investment strategy from an economy that is reopening from the Covid shutdown. Equity market leadership has changed dramatically in the past three and a half months.  Those strategies which have been able to incorporate energy and commodities have held their own. The others have had more difficult paths but are still contained within this correction in the context of the long-term Bull Market. And there is lots of time, as always, for improvement.

It would be great if bonds represented a reasonable alternative to equities, but they do not. Rising interest rates and high inflation are more destructive to bonds than to equities. Historically, they also have had a much longer impact. Bond markets do not cycle as rapidly as equity markets. Interest rates have been dropping for many years, some economists have even counted decades. This has resulted in higher bond prices for many years, and decades. Now interest rates are starting to rise, which causes bond prices to fall. Bond prices can fall faster than interest rates can compensate, resulting in negative total returns. This can continue for years, and decades. There is no quick fix for a Bear Market in bonds, which appears to be becoming a reality.

There are bond sectors which can represent sanctuaries during rising interest rates. These include floating rate bonds, short-term bonds, and  equity-linked bonds such as certain convertible and high yield bonds. These sectors are worth considering in the current environment. In a similar vein, there are equity sectors which may present opportunities during periods of inflation. Energy immediately comes to mind, and basic materials sectors have historically held up well. Commodity securities are more complex but have been the top performing sector year-to-date. Financial markets have become more narrow in focus, but remain intriguing.  

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

© 2022 Edward D. Foy.   [email protected], .

Sources:,,, Morningstar.