Sideways

Markets, even in the unprecedented moves of this year, do not move in straight lines. A trending market will move, move, move and then, suddenly, seemingly, will move in the opposite direction.

This is how markets move and lately it has been sideways. For bonds, we might watch the US treasury ten year note yield. On June 14^th the yield hit a new high yield of 3.50% (all yields/prices per Bloomberg) which also means it was a new low for price. It was a new high for yield (low for price) that had not been seen since 2011. The opposite, seemingly, of the low yield (0.31%) and high price extreme of March 2020, the end of the bond bull market. And yet, over the following days, yields suddenly reversed course, plunging to 2.74% on July 6^th. It has been sideways since.

I bring this up because stocks, suffering an unprecedented decline this year, hit their low on June 17^th with the S&P 500 Index hitting 3637, a steady decline from the 4818 high of January 4, 2022, for down 24%. The decline has ended, seemingly, and since June 17^th stocks bounced. It has been sideways since.

In a downward trending market, the type of market bonds and stocks now find themselves, corrections are upward moves in price. Lately we are not marking new price lows in these markets; we are moving sideways. This period is a correction of the new downward trends for bonds and stocks.

Corrections can confound traders. Suddenly, their trades are not working for them, but instead the trades are working against them. It is a gut check: continue with the trade in the hopes the correction is temporary or reverse their trade and risk a whipsaw effect.

I’m not concerned with traders. I am concerned for investors. Here corrections can be extremely dangerous. Long-term investors may have looked at moving a portion of their investment to cash or short-term bonds, but then, suddenly, the market bounces upward in price. A reprieve: perhaps this is the end. This is not how a bear market works.

Not having sufficient memory of a bear market in bonds and/or stocks is common. You need to go back over forty years. So let me simplify: a bear market is the opposite of what you as an investor has enjoyed all these years.

Rather than higher prices interrupted by periods of downward (temporary) price moves, a bear market exhibits the opposite: lower prices are interrupted by periods of upward (temporary) price moves. We can see this best by looking at bonds, where the bear market is over two years old while stocks, at seven months, is early in the bear market.

The bond market did not move from .31% to 3.50% in a straight line. It was trending to higher yields yet there were several times that bond prices moved sideways for a month or two. But make no mistake, the trend was lower in price: a bear market for bonds.

A bear market for stocks will exhibit similar behavior. Over the past four weeks stocks have moved sideways without marking a new low. So far this is temporary, and, in a bear market, it will be temporary. With the S&P 500 Index only down 24% at its low there is plenty of room for this bear market to run south.

For investors focused on what the media and polls now find as our current greatest threat, inflation, let me say they are worried about the wrong thing. I am reminded of the scene in the movie Butch Cassidy and the Sundance Kid. When faced with capture, Sundance refuses to jump off a cliff into the river below. “I can’t swim!” Butch laughs, “The fall’ll probably kill you!”

You cannot control inflation, but you can control your investments. A bear market in stocks may “probably kill you,” financially. But you, unlike Butch and Sundance, currently have better alternatives…if you choose to use them.

Sideways moves do not continue for long. In a bear market, lower prices result. At down 24% in June, are you prepared for lower? Focus on what you can control and ignore that which you do not. Sideways gives you a chance to get your portfolio right.

Klein Independent School District, TX

Unlimited Tax Schoolhouse Bonds, Series 2022

Aaa Moody (Aa1 Underlying)   AAA S&P (AA Underlying)

Due 8/1   Dated 7/15/22 Maturity 8/1/47

$142,675,000 Sold

Years   Maturity           Coupon      Yield*

1         2023             5.00%           1.59%

2         2024             5.00%           1.81%

3         2025             5.00%           1.93%

4         2026             5.00%           2.00%

5         2027             5.00%           2.09%

6         2028             5.00%           2.26%

7         2029             5.00%           2.39%

8         2030             5.00%           2.48%

9         2031            5.00%           2.58%

10       2032             5.00%           2.65%

11       2033**          5.00%           2.76%

12          2034**        5.00%           2.86%

13          2035**        5.00%           3.01%

14          2036**        5.00%           3.07%

15          2037**        5.00%           3.11%

16          2038**       5.00%           3.15%

17          2039**       4.00%           3.64%

18          2040**       4.00%           3.71%

19          2041**       4.00%           3.79%

20          2042**       4.00%          3.83%

25          2047**       4.00%           4.00%

*Yield to Worst (Call or Maturity) ** Call 8/1/32

Source: Bloomberg

This is an example of a new issue priced the week of 7/11/22

Prices, yields and availability subject to change

This Letter Originally Published 7/22/22