August 401k Update and Outlook

Heat of Summer slows the pace of growth for the markets! July was very mixed for the indexes and they managed to close on the negative side on the last trading day of the month¬†. Let’s start with the¬†returns for the major market indexes in June:

  • Dow Jones Industrial Average – up 0.65% (June) & ¬†up 1.6% (YTD)
  • S&P 500 Index –¬†down 1.59% (July) ¬†& ¬†up 4.45% (YTD)
  • NASDAQ Index – up 3.9% (June) ¬†& ¬†up 4.45%¬†(YTD)
  • Russell 2000 Index (small cap) up¬†5.15% (May) ¬†& ¬†down 2.52% (YTD)

July ended with left over fireworks from the 4th celebration. The S&P 500 index was slightly positive for the month and then a decline of nearly 2% on the last day of the month sent the index into negative territory. I make this point because as we go forward that day may be the catalyst that started or established a downtrend in the broad markets. On time will tell and a long term perspective we still have room between the close and the uptrend line we are using as  our exit point should the index continue to move lower.

The primary driver for the indexes on the upside has been the belief in the Fed relative to the economic growth being restored in the second quarter. Miraculously enough the GDP did show 4% growth. Interestingly enough exactly what the Fed had projected for the economy. That should be good news, right? Well it has not been good news and the markets have not responded any where near what you would have projected. Thus, the optimism about the second quarter was justified according to the numbers. Then why the selling?

As the old saying goes, “be careful what you wish for, you may just get it!” We got it and that introduced the next question, “when will the Fed hike interest rates to curb inflation?” Many are now speculating that will be sooner than originally thought and the speculation is creating fear and volatility in the broad market indexes. If the Fed hikes sooner than expected will the economy still or grow? Or, does the market stay healthy enough to adjust for the higher interest rate costs? Uncertainty is the word that I like to assign to these situations. Investors are not sure of what will happen looking forward and that creates nerves and selling on fear of what may happen.¬†Thus, we have to be on watch going into the month and make the necessary adjustments in the event the markets do sell lower.

The first chart below is the one we ran at the end of June. As you can see the trendline gap to the closing price was approximately 85 points or 4.4%. The second is the chart run for the end of July. The trendline gap has narrowed on the decline to approximately 20 points or just over 1%. That is one key item we need to watch carefully in August. A break of the trendline would be a exit point for at least half of our position if not all. We will post an alert on the percentage to withdraw on the move.

SP500

sp500 gap

If you follow any of our daily posts you know we are not in love with the fundamental data of the market currently. That said, they did improve in July based on the economic data and forecast. Now that the prognostication is for better growth the markets are selling or consolidating on the facts? This is not usual as markets tend to trade looking forward. When things are bad, but projected to get better the market is more forgiving in anticipation of the future growth. When we attain the objective in growth the tendency is to become more picky about the data and see dips or selling as investors want perfection in order to meet the expected growth rates. Thus, it works almost in reverse of what you would expect or anticipate.

The primary question heading into the second half of the year… “How much of a correction or test does the market produce and what will the catalyst be on the downside, if any?” The growth is projected to slow to 3% for both the third and fourth quarter. That is in light of stimulus being withdrawn by the Fed by the end of October. The challenge is the uncertainty of how these actions will impact the future growth. No way of really knowing and that has started money to the sidelines to wait for clearer signals and opportunities.

Is there a correction on the horizon? I would have to say yes,at some point, but attempting to be prophetic about when and how much will give you grey hair or make you pull it out. For that reason we believe it is best to stay the course and let the trend unfold one day at a time. The benchmark we are now watching is the July 24th high water mark for the S&P 500 index. We declined 2.8% off this mark to close the month on July 31st.

There are other pressure points for the market and investors to watch as we progress through the month. Russia/Ukraine are back in the news and the questions are the same, will Russia do something militarily? Will this impact oil exports? Sanctions, how much and when? This geopolitical issue along with so many others in Israel, Iraq, Egypt, Turkey, India, etc. are all playing a role in how investors view the markets looking forward. Worry is just one key work that comes to mind.

As seen on the chart above the support near the 1900 level on the S&P 500 index is the level to watch for key support going forward. If this fails to hold we could see deeper moves on the downside. Watching closely as this a key point looking ahead.

Energy, technology, consumer services and real estate have been the sector leaders for the broad indexes. They are the ones to watch in this case for the downside. It they fail to hold support and trendlines it will accelerate the selling the correction for stocks. Until or if that happens the trendline is still on the upside and we will honor the move relative to the trendline.

Be patient and most of all be disciplined.

The following is our current allocation for 401k portfolios:

  • 100% of assets allocated to the S&P 500 index funds. For our allocation we are using the Fidelity S&P 500 Index Fund (FUSEX). We have held this position since the start of the year with no changes.
  • Jan 1st NAV = $65.20
  • July 31st NAV = $68.54 (change YTD = +5.1%)
  • Current Allocations from Paycheck (deposits) = 100% Fidelity S&P 500 Index Fund.
  • If we break below the 1900 level on the S&P 500 Index sell 75% of the holding in the fund and move them to the Money Market account. (we will send a email to that effect as confirmation.)

If you don’t have Fidelity in your 401k you will have a S&P 500 index fund that is similar with Vanguard or whomever the assets are managed by. If you need help simply send us an email with your list of available funds and we will tell you the best match to the allocation. Info@JimsNotes.com is the email address.

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Remember, investing is a journey towards a predefined destination. Sometimes the destination changes, but it will always be about the journey, and the discipline it takes to get there.