Another Doozy—and You Can Handle It

It was another doozy of a day on Wall Street, and don’t you know it.

Everything crashed today:

-2.4% Dow
-4.0% Nasdaq
-3.9% Nasdaq 100
-2.8% S&P 500
-2.9% S&P 400
-3.0% S&P 600

A long downward grind can weigh on even the most stalwart investors, even ones like us who follow rigorous plans. In case you’re feeling the heat, I wanted to reach out tonight.

Stocks fell today for the same reasons they’ve been falling all year: high inflation, the Federal Reserve’s attempt to cool it, and Russia’s invasion of Ukraine. The latter is awful in its own right, but also contributes to inflation by keeping oil prices high.

On top of this base of anxiety, today added fear that China will lock down additional parts of its country, contributing to supply-chain woes which could sharpen inflation and dampen global economic growth.

Bad getting worse brings a positive aspect: lower sentiment, which is necessary for a base to form and a recovery to begin. We’re starting to see financial headlines in non-financial media, which is encouraging.

For example, this evening’s Drudge Report is headlined:

Wall Street Rattled
Dow -809
Tesla Wipes Out $114 Billion

And from the front page of The New York Times:

Stocks Drop 2.8%, Led Lower by Tech, as April’s Slump Continues

Fear is everywhere.

About 90% of S&P 500 stocks fell today. Money rushed to safe havens, such as Treasuries, pushing yields down. The 10-year now yields 2.77%, down from 2.90% on Friday. The CBOE Volatility Index (VIX) rose 24% to 33.5.

This is what down cycles look like. It’s not like we’ve never seen one before. They’re always this dark, and darker. Always the right move to have made was to buy or hold. Anybody who sold ended up regretting it.

Many analysts flagged big tech as oversold heading into earnings, hoping for a post-earnings pop for the headliners of the Nasdaq 100. That hasn’t prevented tech from selling off as hard as any other section of the stock market. When the collective gets nervous, risky stuff goes out the window and safe stuff comes in—precisely the opposite of what leads recoveries.

You can find somebody saying whatever you want here.

If you want to hear that a recession is unavoidable, that tech faces years of struggle, that Covid will never end, that inflation will persist, and that a nuclear war is likely, I can round up the names to say it.

If you want to hear that the US economy is strong enough to avoid recession, that big tech is fine given Microsoft’s double-digit growth forecast for its Azure cloud computing unit, that the pandemic is over and never was dangerous given low fatality rates and the types of people who died, that inflation has already peaked, and that Ukraine will prevail over Russia without nukes ever showing up, I can round up the names to say it.

But, really, do you need that?

After our time together, our level-headed look at market movement, you know that this how it always goes. And it all fits neatly under the heading Fluctuation. The market was up for a long time, it’s going down now, it will go up again—and longer than it went down. The correct way to manage this long-term rising line that wiggles is to react to its prices, as we do. They’re down now, leaving just two reasonable options: buy or hold.

This moment will one day blend into the long-term price line as a downward blip requiring a label reading “inflation, interest rates, Ukraine” to remind us that something happened there. Using our own recent history as a guide, notice how massive the Covid crash looked at the time:

The Kelly Letter performance chart in April 2020

And how little it looks just a couple years later:

The Kelly Letter performance chart in April 2022

If this much changes in just two years on our own chart, it’s easy to see why the forever charts of the general market absorb all events that seemed giant at the time.

As prices and sentiment drop, value builds. Progress is being made through the set of current problems, even if only by dint of time lapsed. No matter how this goes, we’re closer to recovery now than we were a month ago. Lost in the noise, earnings are going well. The S&P 500’s earnings in aggregate have beaten expectations by 7%. Eventually, this will matter.

I have no magic news for you today. No secret that I heard revealing why prices will turn higher any moment now. All I have is the history of our plans and my own belief that patience and discipline are likely to be rewarded again.

Well, that and this reminder: The turn will come out of nowhere. It will look like there’s no way things will ever get better. Then somehow they will, and we’ll be able to identify the beginning and end of the 2022 crash only in retrospect. That, too, is always how it goes.

The S&P 500 comes back as quickly as it went down. According to Global Financial Data, the average correction’s peak-to-trough drop in the S&P 500 since 1928 was 14.9% over 4.2 months, with average recoveries from the trough as follows:

S&P 500 Average Recoveries
from Correction Troughs
Since 1928 (%)
– – – – – – – – – – – – – – –
25.7  in 6 months
33.9  in 12 months
38.3  in 24 months

Now, they weren’t always straight up. Not all recoveries go the way the pandemic recovery went. Volatility is the name of this game, after all. The up and down rhythm never gives way to a straight line.

As for whether this is a correction or a bear market, my vote is the former.

Nothing going on is financially big enough to crush the bull market, and all of it is exhaustively covered in media. Nobody will be surprised by an inflation headline or interest-rate hike. This quick drop has all the markings of a correction. If stocks are part of your long-term financial plan, there’s no way to avoid them. There’s also no reason to. They’re useful, as our plans demonstrate.

So cheer up. We started the year hoping for lower prices, got them in our first-quarter buy signal, and still have additional buying power for future buy signals. You’ve been through cycles like this before and you can handle them. So can our plans.

I’m available by email with a simple reply, and the subscriber site is lively with discussion.

Have a restful night!

Yours very truly,

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14 Comments

  1. VICTOR
    Posted May 9, 2022 at 11:59 pm | Permalink
    • Posted May 26, 2022 at 6:05 am | Permalink

      Hi Victor,

      This is late, but now my response is even more appropriate because TQQQ is cheaper than it was a couple of weeks ago: I like the contrary nature of this post, treating Cramer’s warning about tech as a signal to acquire shares of TQQQ. At about $28, the fund is near its 52-week low.

      Jason

  2. Neil
    Posted April 28, 2022 at 12:13 am | Permalink

    During the week following our big buy signal, I deleted the stock app from my phone and my tablet and just stopped paying attention to the stock prices. This is a tactic that I also used during the pandemic and I highly recommend it.

    My only view of the stock market is through Jason’s letters and occasional news segments. During these challenging times, I just find it too stressful to watch the markets closely, even if I don’t plan to act on anything.

    I am truly grateful for this plan and Jason’s weekly letter and I loved seeing the chart from the bottom of the pandemic followed by the current chart.

    I am a big believer in the idea that day always follows night, but it is, nevertheless, always reassuring to be reminded with data as well as words and to have the comfort of being in the company of many like-minded people.

    Thanks Jason!

    • Posted May 26, 2022 at 6:19 am | Permalink

      My pleasure, Neil, and thank you for the perfect perspective! We are like-minded, indeed.

  3. Mike S
    Posted April 27, 2022 at 8:18 pm | Permalink

    I watched several financial shows throughout the day yesterday and ironically they helped me build confidence in our plan. They paraded experts on screen all day who said the market was definitely overvalued, undervalued, poised to go lower, definitely at bottom, priced in Fed increases, unclear of Fed plans, prepping for recession, plowing through a correction, etc. It became so clear that none of them really knew what was happening or will happen.

    So I’m sticking with Jason and trying to look away.

    • Posted April 27, 2022 at 8:40 pm | Permalink

      Ha! I love it. Indeed nothing builds confidence in a timeless structure that assumes price fluctuation than watching the pundit guessing game on full display.

      Thanks, Mike.

  4. John aka Errol
    Posted April 27, 2022 at 1:42 pm | Permalink

    I’m almost finished reading The 3% Signal. The BEST investing book I have ever read. Very readable, clear and easy to understand.

    I plan to subscribe to The Kelly Letter soon.

    Thanks for the reassuring email, even though I’m not yet a subscriber.

    Have you seen the letter to the editor in The Wall Street Journal, April 22, 2022 under the title, “Investing in a Home Was ‘Buffett’s Folly.’ Is It Yours?”

    Just think what $62,200 invested in 1980 using the 3% signal would be worth now.

    Thanks again for writing the book!

    • Posted April 27, 2022 at 8:39 pm | Permalink

      Thank you, John!

      Yes, I did see the opinion piece in the Journal, and couldn’t agree more with its basic idea that rising income beats rising prices:

      “A better choice [than real estate] would be high quality, dividend-paying common stocks, as rising income beats rising prices. The median home price was $62,200 in 1980. By the end of last year, it was $340,000. The same 1980 investment in the Investment Company of America, a growth and income mutual fund, would be worth $7.4 million as of 2021.”

      Stocks have been the best investments over time, a fact well worth remembering in times like now when the market is down.

  5. Steve
    Posted April 27, 2022 at 11:58 am | Permalink

    Thank you, Jason.

    Great to have a dose of rational news in the midst of a sea of media pessimism. But then media pessimism is all we get from that quarter these days, isn’t it? I am grateful for your investment plans. Math and solid logic don’t lie. There is much comfort in that principle alone but it is especially meaningful when we see it at work over time. Your encouragement and rational observations are always welcome. Thanks again.

    Gratefully yours,
    Steve-retired-to-the-ranch

    • Posted April 27, 2022 at 8:33 pm | Permalink

      Of course, Steve.

      I agree. When emotions rule the day, hunkering down with our math and sticking with our schedule provides comfort. Why, a person could manage a ranch with all the free time created by our plans!

      Glad to have you,
      Jason

  6. Kay Stewart
    Posted April 27, 2022 at 11:39 am | Permalink

    Counselor.
    Therapist.
    Advocate.
    Comforter.
    Comrade.
    Cheerleader.

    Thanks. We needed that.

  7. Karuna
    Posted April 27, 2022 at 10:16 am | Permalink

    Thank you very much for reaching out with your steady hands and steady plan. Crashes like are happening right now tend to make us weak in the knees and it’s at just such times that a bit of reassurance goes a long way. So thanks!



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