I'm going to keep it short and sweet today, as the market throws its first really big punch of this bear market.
SMI members have spent the past six months preparing for this. We started preparing mentally and emotionally way back in December, as we looked ahead to an ominous market landscape in 2022. We've prepared our portfolios by taking incremental defensive steps each month since, eliminating at the end of January the growth stocks that have borne the brunt of this bear market, while adding energy stocks alongside our commodities positions at that same time. We've raised cash bit by bit, to 40% in Upgrading and 33% in DAA.
Now, as the market correlations tighten up (as they always do eventually during bear markets) and everything seemingly falls together, what do we need to do?
Nothing. Because we've already done it. We've earned the right to not have to "do something!" in the middle of the hurricane.
The SMI process is working. You can see that measured objectively every day on the Morningstar performance pages of the funds following SMI's Upgrading and Multi-strategy (50/40/10) approaches. The "YTD" (year-to-date) column tells the tale — through Friday's (6/10) close, Upgrading was down -3.5% in 2022 and 50/40/10 was off -7.0%. Those are extremely mild losses while the S&P 500 index was down -17.6% and the Nasdaq -27.5%.
But the news is actually better than that. I've noted before that the S&P 500 index didn't set it's final all-time high until early January of this year. As a result, our SMI strategies were still positioned quite aggressively to begin 2022. We didn't make any substantial defensive adjustments until the end of January. Since that time, an SMI blended portfolio is actually up, while the market has continued to fall!
Bear markets are tough
None of that means we are exempt from feeling some of the market's anxiety on days like today. What it does mean is we don't have to act on it.
If this bear market is allowed to run its course and it looks anything like past "big" bear markets, there's every reason to believe this could last another 6-12 months. That's okay — if you're following the SMI strategies, you're not only prepared to survive a bear market of that magnitude, you're prepared to profit from it. Not by being a hero and jumping in to buy "bargains" on every drop. Not by panicking and moving the rest of your portfolio to cash on a day like today. But by following the tried and true process SMI is following — the one that has every likelihood of continuing to maintain the value of our portfolios while the market gets progressively cheaper.
By doing that, when the strategies finally indicate the worst is over and it's time to start redeploying our preserved capital, we'll be buying back into the tremendous upside potential that always exists as a bear market ends and a new bull is born. We don't know how soon that will come, but we're confident we'll be ready to take advantage when it does. For now, relax and rest easy knowing you're ready for this.
Matt will have more on following a reliable process later this week, and hopefully, I'll have a Private Client update to share later this week as well. We're in this together with you, and if we're all patient and disciplined, we have every reason to expect today's threat will ultimately prove to be tomorrow's opportunity. That's not just peppy, optimistic talk — it's what we can objectively see happening already in our portfolios.