As Fall Falls: A Market Perspective

As Fall Falls: A Market Perspective

As fall falls and the temperatures signal a new season, we are reminded why we love this time of year in Wisconsin. We are replacing our shorts and swim trunks with flannel shirts and hooded sweatshirts. Even though most of us have been through the Midwest seasonal pattern for decades, every season feels new and different from last year or the year before. We know that it isn’t different. Leaf colors will change and eventually drop. Snow will fall and temperatures will once again have a minus in front of them. 

The investment markets tend to run in similar cyclical patterns. Albeit not as predictable as the seasons, stock and bond markets have a familiar rhythm. Investment markets peak, then fall, eventually bottoming out before rising again. While we all know this and have likely been through the cycle, it is very easy to get lost in the noise, feeling as though this time it is different

Proper perspective is one of the most essential traits of successful long-term investors. While it is sometimes difficult to deal with freezing temperatures day after day in January and February, we know that by April and May things will improve. It is harder to have a solid perspective when the investment markets fall and show no indication of recovery. The majority of stock and bond markets started 2022 sliding downhill and have continued that negative momentum through the third quarter. If the first nine months of 2022 were an “investment market winter,” we don’t have the luxury of looking at a calendar to tell us when spring will arrive. 

Market Perspective: The Last 30 Years in the S&P 500

When I begin to lose sight of the big picture, I tend to look at history as a way to get my bearings. Here is a chart of the S&P 500 annual returns for the last 30 years. 

There are two significant takeaways from this chart. First, in the last 30 years, the S&P 500 has only had five years of negative returns of more than 2%. Second, only one of these years occurred in the last 13 years. The first takeaway helps to provide context. Most investors define themselves as long-term, with a time horizon of more than 10 years. Therefore, seeing the last 30 years of returns can give us a useful long view. The second takeaway helps us to better understand the unique nature of the most recent bull market. From 2009 – 2021, there was one meaningful down year over these 13 years. Most bull markets last just under three years. While a market downturn was inevitable, predicting when it would start and the depth of the downturn is impossible. Coming off the down year in 2018, many respected economists and market professionals were predicting a difficult year for the US stock markets in 2019. As we can see from the chart, the S&P 500 index posted a total return of over 28% for 2019 and started a three-year run of double-digit positive returns. This isn’t throwing stones at the economists and market professionals who got it wrong in 2019, simply pointing out that predicting market returns or when markets will fall in any given year is incredibly difficult. 

Raising of the Fed Funds Rate and Bond Markets

Now that we have a better understanding of the recent history of the U.S. equity markets, let’s turn our attention to the fixed income or bond markets. As jarring as 2022 has been for the equity markets, it pales compared to what has transpired in the bond market, particularly due to the Fed raising interest rates. The Federal Funds Rate, which is the rate most often adjusted by the Federal Reserve, began the year at .25%. As of Oct. 3, the current Fed Funds Rate sits at 3.25% as a result of three straight .75% increases. 

The Fed is raising interest rates to combat soaring inflation. While this is necessary to help contain the current inflationary environment, it is leading to an incredibly challenging bond market. This coalescence of events has led to the worst start to a bond year since 1842. Here are three popular bond indexes to illustrate the negative 2022 performance.

The positive byproduct of the Fed aggressively raising interest rates is that we are finally in a higher-yielding bond environment. Newly issued bonds from the U.S. government and corporations are paying much more attractive interest rates than in the past 15 years. 

Perspective is easily lost in light of the turbulent market conditions. Much like the despair you feel when we receive that early March snowfall, it is helpful to keep in mind that the current stage of this cycle will run its course and the markets will grow again. This is the time to review your portfolios and investment strategy to ensure that you are well positioned for your long-term goals.




Nate Condon is one of the co-founders and managing partners of Walkner Condon Financial Advisors. He is a fee-only, fiduciary financial advisor who works with clients locally in Madison and around the country.

The Evolution of the S&P 500: Where Do We Go From Here?

The Evolution of the S&P 500: Where Do We Go From Here?

The year of 2020 was a very strange one indeed. For the U.S. stock market, however, if you looked at the beginning and the end of 2020, you’d see the S&P 500 up about 16.6% and conclude that this year was merely more of the same ol’ U.S.-dominated bull market that prevailed throughout the prior decade as U.S. stocks led global markets out of the very deep bear market experienced during the Great Recession. The leadership experienced by the blue chip S&P 500 stocks over smaller stocks indeed persisted in 2020 just as large caps have outperformed small and mid-cap stocks over the bulk of the post-recovery bull market. The similarities don’t end there, as 2020 was a year again dominated by winning sectors within the S&P that have been doing the heavy lifting for quite some time, led by mega cap darlings that epitomize innovation and success in their dominance of our digital economy. Here are the top three sectors ranked by performance in 2020:


Yes, those predicting the demise of “FANG” stocks are going to have to wait at least another year (or another 10 years) for vindication, because COVID-19 not only caused investors to gravitate toward what few stocks were still showing earnings growth, it actually caused businesses and consumers alike to lean even more heavily on the digital economy in their day-to-day affairs to navigate the new reality of pandemic, lockdowns, and social distancing. Indeed, it’s entirely fair to say that many of the trends that had long benefited the digital economy stalwarts, such as the migration to social media, streaming entertainment, online shopping, etc. truly accelerated further because of the Covid-induced recession.

On the other side of the coin, 2020 and the Covid-induced recession predictably brought on hard times for those parts of the S&P that contracted sharply from an environment of staying at home, shopping online, and near-zero prevailing interest rates. These are the three worst performing sectors of 2020, which all managed to finish in the red (as did utilities) in a well above average year for the S&P 500 on the whole (percentages shown are negative):


So, we see that 2020 was a year that no one will likely ever forget, and yet, from the perspective of the S&P 500 index, it was very much a continuation of 2019 and before, with the largest growth stocks leading a new digital economy and doing almost all of the heavy lifting underneath the surface of a rampaging S&P 500, while value/dividend investors suffered yet another disappointing year of dramatic underperformance.

Let’s put this technology-driven trend in proper perspective, comparing the S&P 500 at the dawn of the post-Great Recession recovery to the end of 2020. Pulling figures from this blog from DataTrek research last March, let’s consider the migration during this nearly 11-year period for the leading and lagging sectors of 2020 in terms of their share of the overall S&P 500. Keep in mind, of course, that the communications services sector did not exist in 2009, so we’ll follow DataTrek’s appropriate and reasonable lead and put Alphabet and Facebook back in the technology sector, and return Disney, Comcast and Netflix back to the consumer discretionary sector (leaving the traditional telecom stocks out of the equation as there is no comparing the old telecommunications sector with the current “communications services” sector). Likewise, real estate was not a recognized separate sector in 2009, so we must also return the real estate stocks to the financials sector to fairly compare 2009 and 2020 figures. Here are the approximate weightings in the S&P 500 for the traditional technology and consumer discretionary winners of 2020 and the energy, real estate and financials laggards of 2020 vs. their relative S&P 500 weightings in March of 2009 (the dawn of the great bull market recovery):



CONSUMER DISC. 14.2% 8.9%
ENERGY 2.3% 13.0%
FINANCIALS 12.8% 10.8%

Those numbers put the two obvious megatrends at the sector level within the S&P into a clear numerical perspective. First, technology was the largest sector at the dawn of the post-Great Recession bull market, and its share of the S&P 500 pie has somehow doubled in size during this period to now constitute nearly one-third of the index. Second, companies that extract dinosaur fossil materials (energy) from the earth are now on the verge of extinction within the S&P, as energy’s sector weighting declined about 82% during this period.

As Clint’s discussion of the electric car megatrend thoughtfully points out, Teslas consume energy, too, right? Clearly, the secular and technological changes in the industry that brought oil below $20 at one point in 2020 have dramatically altered investors’ appetites for crude and its derivative products, and the ESG trends that Mitch discusses clearly aren’t helping, either.

Trends persist, often much longer than most imagine they can persist, and this has been a classic example within the S&P 500 for years. However, there is no bigger curse for investors than to be late to the party. Even the most persistent trends eventually give way and reverse course, and often violently. Think NASDAQ circa 2000 with the pricking of the internet bubble. That was a painful time for many investors that bought into the idea that the secular trend of internet adoption would rewrite the rulebook on investing and that traditional fundamental analysis of technology/internet investments was no longer applicable. This was an age when I distinctly remember repeatedly hearing the most dangerous four-word sentence on Wall Street: “This time it’s different.”

Would we dare utter those words today? What if I told you that the Information Technology sector of the S&P 500 in December was trading around 45 times trailing one-year earnings, and about 40 times the estimated earnings for the coming year, while the Consumer Discretionary sector was trading at 85 times trailing one-year earnings and 38 times estimated earnings for the coming year? That seems quite frothy indeed. This illustrates a major premium that has been paid (and continues to be paid) for growth, not at a reasonable price, but at any price, in a world where there was (and there remains) a scarcity of growth (i.e., the Covid-induced recession). 

However, there are many metrics by which we can judge the current S&P 500 in the context of history. I recently revisited one thoughtful article from October 2018 by a very seasoned Wall Street veteran who expressed concern about the froth within the S&P 500 back in 2018, echoed my revulsion of the most dangerous sentence ever heard on Wall Street, but keenly observed that adjustments in historical time frames could dramatically alter the perception of relative froth in the S&P 500. There truly is a data point for every argument.

Therefore, as we happily put 2020 in our rearview mirrors and look to the future promise of 2021, what can we expect for the S&P 500 and its component sectors? Prognostications are dangerous and common sense negates the follies of both ignoring a trend and blindly riding a trend into oblivion. In other words, it would be unwise to overly commit to the notion that, because the S&P 500 has led world stock markets, and technology, communications services, and consumer discretionary stocks have dominated the S&P, that you should cash in your chips and place all bets elsewhere. On the other hand, the magnitude of the outperformance of the S&P 500, and particularly of those sectors and mega cap stocks most responsible for that outperformance, has increased the risks associated with those investments relative to other sectors within the S&P 500 and relative to other stock indexes, foreign and domestic. 

The prescription for navigating the market ahead is an ageless remedy:

  • Examine your portfolio and the underlying allocations to U.S. stocks, to sectors within those U.S. stock holdings, to non-U.S. stocks, to bonds, to alternative investments, etc.;
  • Determine the extent to which the trends discussed above have left your portfolio over-exposed to U.S. stocks and particularly to the growth stocks and the favored growth sectors that have led the S&P 500 to new heights in 2020; and
  • If you determine that the weightings in your portfolio make you uncomfortable with the potential eventuality that money flows reverse away from these investments into more neglected segments, sectors, and regions within the global stock markets, then by all means REBALANCE — sooner, rather than later.

Given the new highs for all the major stock indexes in the U.S., it is probably safe to assume that investors, in general, are anticipating a smooth rollout of Covid vaccines as we move into 2021 and a major economic rebound as life starts to return to something resembling normal. If this occurs, we could very well see outperformance in sectors of the S&P 500 that massively underperformed in 2020, and that could very much come at the expense of 2020’s market stalwarts. After all, for money to move to the less-loved sectors of the S&P, it has to come from somewhere and, right now, practically one-half of the money in U.S. blue chips is in technology (infotech and comm. services) and consumer discretionary stocks. More breadth in a rising market would be quite welcome. However, only time will tell whether and to what extent the underlying economy will have a robust recovery and to what extent the current pandemic has produced long-term fundamental shifts within the economy that could provide continued challenges for certain sectors and industries within the domestic and global economy. 

Stan Farmer, CFP®, J.D. 


This piece was part of Walkner Condon’s 2020 Review & 2021 Investment Outlook Guide, a comprehensive interactive PDF covering a wide range of subjects and trends, including the S&P 500, electric cars, and more. To read the full guide, please click the button below.