Market analysis: the road to nowhere



The year so far has been fraught with confusion and angst as the US faces inflation not seen in 40 years and the prospect of a Russian invasion becomes more likely. The market, always sensitive to global instability, has behaved so far this year violently in both directions, not making a clear case for a direction other than sending us another reminder that volatility is real and here to stay. As markets trade strength for weakness, not all stocks and bonds are the same. And, if history is any indication, global strife can generate opportunities for investors, if they know where to look.


The market started this year clearly in an overbought (overpriced) position, meaning that there was an obvious need for a sell-off to create a more “normal” market. The SP500 was already higher by 115% since the low in March 2020 and so far this year, it’s down by a little more than 7%. The SP500 is just a collection of the largest 500 US companies, largely influenced by Apple stock (in fact, the SP500/Apple correlation is almost 30%^1). This index doesn’t represent the individual areas within the market that may be outperforming, doing well considering, and in some cases, maybe the place of the next investment opportunity.


It’s easy to assume that an emerging conflict of a major energy exporter, say Russia, will cut supply and thus increase the cost. The US energy stock index “XLE” is 160% higher since the Oct 2020 low and 25% higher so far this year. The oil index “DBO” is almost 20% higher so far this year. These are two indications of further stress on this market, suggesting higher prices.


It should also be easy to assume that with inflation comes higher interest rates. The sector of the market that most benefits from higher rates is banks. Although they’ve already benefited from major profits over the last decade, they seemed immune to the latest market turbulence as the Fed is expected to raise rates 7 times this year, according to Goldman Sachs^2. The financial index “XLF” was higher by 135% since the Mar 2020 low as is higher so far this year by 3%.


The market adjustment that we’re all in the middle of should remind us of certain investor realities. With rising rates come more expensive debt payments (new and variable debt), bond holdings will go down in value, as rates are inversely related to bond prices, and leveraged stocks will go down (as margin debt costs increase). The latter can be referred to the tech sector, which investors have famously levered up to buy more Google, Tesla, and so on. This can create a false reading on the stock’s fair valuation and sets the stage for a major correction in this area.


Experienced long-term investors know the benefits of holding positions during volatility. Not seeing a major market correction since 2020 should remind investors that this action is inevitable and redundant over the lifetime of any portfolio. Revisiting your cash needs, time horizon on your investments, and overall financial situation is advisable if you’re also investing. I provide investment advice, retirement planning, and more. Call for a free virtual meeting at (760) 537-0792 or book online at eurekawealthmanagement.com.




^1: https://www.macroaxis.com/invest/pair-correlation/AAPL/%5EGSPC/Apple-vs-SP-500

^2 https://www.reuters.com/markets/europe/goldman-ups-fed-hike-forecast-7-rate-increases-2022-after-cpi-data-2022-02-11/