Honey, I Shrunk the Year-to-Date SPY Gains!

Honey, I Shrunk the Year-to-Date SPY Gains!

Once up 20%, SPY’s correction concerns investors.

Reviewed by: Kent Thune
Edited by: Lou Carlozo

Stock market corrections come with the territory: Historically, they occur about every other year. But statistics of that nature don’t tell the whole story. While investors tend to focus on the S&P 500 and the SPDR S&P 500 ETF Trust (SPY), one of the best reasons to study up on ETFs is that they paint a concise market picture.  

And right now, it depicts more of a shrinking violet than a towering champion. 

While the market’s current correction hasn’t translated into the panic selling of equities, it has inflicted a ton of damage beneath the surface of the “headline” indexes—particularly since the market’s peak at the end of July 2023.  

SPY and the Invesco QQQ Trust (QQQ) are the headliners for many. And that they are up 8.6% and 30.3% respectively this year, even after September and October’s declines, may explain why the day-to-day stock market action remains relatively calm.  

Stock ETFs: Calm Before the Storm? Or is the Storm Already Here 

But as forecasters of every stripe say, maybe this is the “calm before the storm.” Investment advisors and self-directed investors alike cite many potential issues that can ruin what seemed at one point like a nice bounce back from 2022.  

Between (deep breath): stubborn inflation, spiking interest rates, cracks in the employment picture, the Israel-Hamas war, disfunction in the U.S. Congress (where another funding deadline looms on Nov. 17), weak demand for U.S. Treasuries … and that quickly-forgotten market-mover, the Fed—which makes its latest policy announcement on Wednesday—there’s a lot out there to watch. 

Now, imagine managing all this back to what one does with their investment portfolio. Heck, I’m exhausted just from typing that long list!  

S&P 500 Enters Correction Territory

We entered an S&P 500 “correction” last week, the first one of 2023. But that’s the current market’s version of closing the barn door after the horse has bolted. Let’s look at other market measures, using ETFs as a quick, handy watchlist like the one you can create for yourself right on our site.  

Since July 31, the stock market has been cracking from the bottom up as some prominent niche sectors have not just corrected by 10%: They’ve entered their own bear markets. These include the SPDR S&P Biotech ETF (XBI), the Invesco S&P 500 High Beta ETF (SPHB) the iShares Transportation Average ETF (IYT) and the SPDR S&P Semiconductor ETF (XSD). All are down at least 19% during the past three months.  

All except for XBI, which was flat for the year before that decline, have given up virtually all their gains for 2023. Or to borrow from the classic Rick Moranis movie, “Honey, I shrunk the year-to-date gains!” But it wasn’t by accident or through some science experiment gone awry. This is the stock market doing what it does to bring greed and fear back into line.  

What ETF Strategies Are Working?

Inverse ETFs. These funds aim to perform opposite of a market index. For instance, while small cap stocks have fallen sharply, the ProShares Short Russell 2000 (RWM) has gained 21% over the last three months.  

The stock market is not on the verge of a deep decline. It is already in one, if we look beyond the so-called Magnificent Seven stocks.  

That means different things to different investors. Some will look at every dip to “buy things on sale,” while others will contend that every generational market decline of 30-50% starts with the first 10% decline. That’s just math.  %22%20/h%20HYPERLINK%20%22https://d.docs.live.net/d7268451bc813df9/etf.com/rwm

This might be one of the many times when simply buying down stocks works out very well. But when so much of the market shrinks like this, it reminds all investment advisors and investors that above all else, investment management equals risk management.  

And when risk comes to the stock market, it can happen very fast: just as it is now. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.