Do you Believe in Miracles?

We just completed the worst first half stock performance since 1970. (See chart below.) To make matters worse, rates increased and bonds were also hit extremely hard. The result was that the ‘standard’ 60/40 portfolio (60% S&P 500 /40% Aggregate Bond Index) declined a record 16.1% in the first half. (We suggest you don’t even open your 401K statements.)

Despite the poor news, you don’t need to believe in miracles. Markets move from excesses in one direction to excesses in the other. We have experienced a huge excess to the upside over many years and now we are seeing the other side. Typically, the downside occurs faster than the upside, so the portfolio pain may be intense, but it typically doesn’t last very long.

Don’t misunderstand, regular readers are well aware that we expect a recession (we’ve been beating that dead horse for some time now). We don’t necessarily believe the current pain is over, but that is precisely why we maintain diversified portfolios. We want to cushion the blow when things are bad and participate as much as we can when conditions are good. Our commodity exposure, a standard in PWM portfolios, has been a huge benefit this year.

The point is that this too shall pass and when it does, we hope and expect the U.S. economy to be in a stronger position than it is today and that will drive positive portfolio performance down the road.

Pavlovian Responses

The stock market was predictably unpredictable this week, responding to each news item as it has been trained to do, but gyrating with each divergent headline. It seems that after 12-13 years of extreme monetary policy stimulation, the stock market has become as well conditioned as Pavlov’s dogs.

What we need to re-learn is that just because the lower interest rate bell rings, it doesn’t necessarily mean that we should salivate over growth stocks, or any stocks for that matter. At some point, the bell rings and the unexpected happens. A great example is the Tech Wreck of the early 2000’s. As shown on the chart below, as the tech bubble rapidly deflated, the Fed was aggressively lowering interest rates (blue line) from a high of 6.5% at the beginning of 2001 to a low of 1.25% toward the end of 2002. The entire time the Fed was lowering rates, the stock was mired in a steep slump (orange line).

We think these Pavlovian responses are unwise. Why? The game has changed. The everything bubble is deflating, as it needs to. The implication is that the rules, which have become so familiar, might no longer apply, as during the Tech Wreck. At some point, especially if a recession arrives, the Fed will reverse course and lower rates again, but bubbles do not reflate and stocks can decline even in the face of lower interest rates. Market excesses are corrected no matter the direction of rate policy.


What We’re Reading

The Justices Send a Message to Congress

Cooling Demand for Goods Threatens to Turn Pandemic Boom Into Bust

Household Income Distribution in the U.S. Visualized as 100 Homes

Inflation will not fall to 2% target for two years, Fed’s Mester says

2 huge chip makers warn of expansion delays as subsidies bill languishes


Palumbo Wealth Management (PWM) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PWM and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forwardlooking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

, , , , , , , , , , , , ,

Articles, General News, Weekly Commentary

By: Adam