After dripping lower every single day this week, the S&P 500 finally touched bear market territory on Friday (defined as a 20% drop from previous high). With the help of a strong late-day rally, the broad market index actually closed slightly higher on Friday — albeit continuing on its streak of back-to-back weekly losses. While we may have narrowly avoided the bear market definition for the S&P500 for this Friday afternoon, the seventh straight down week for both the S&P 500 and the Nasdaq has been brutal. The tech-heavy Nasdaq has been down more than 20% from its previous highs since early March. The Dow Jones Industrial Average, still only in a correction as defined by a decline of 10% to less than 20% from prior highs, logged its first eight-week losing streak since 1923. 

The main culprit of the market remains red-hot inflation. What accelerated the sell-off in the past week was disappointing quarterly results from giant retailers Walmart (WMT) and Target (TGT), stoking concerns about demand destruction due to inflation. Both companies hugely missed expectations and revised forward guidance substantially lower. The reports showed that even the best operators are being hurt by the rapid rise in fuel and logistics costs. In addition, consumer is slowing down in their spending for discretionary goods. Higher input costs (lower margins) coupled with slowing demands (lower revenues) is the one-two punch that sent the stocks of giant retailers like Walmart, Target or Costco down greater than 20% this week alone.  

The problem doesn't just stop here. What these companies have not done is raise prices on the goods that they sell, and it's a pretty good bet that after this horrendous quarter, the C-suites will have to decide to do so. This will make the inflation problem worse. If grocery and toiletry costs increase while your wages haven't, you now have less money to spend on discretionary economic activities such as dining out, travel, or buy iPhones. We believe this fear is why earning results from these two retailers could send the entire market down this week.

There you have it: the bear market thesis. A lot of things are currently bad and certainly can get worse.

But we don't choose to see it that way. We are long-term investors and we have to believe this is where money is ultimately made. The entire market is on sale right now, and we need to view this as an opportunity to scoop up great companies at a cheaper price, meaning getting great value. Remember, price is what you pay, value is what you get. 

We've talked about the case for AMD multiple times this week, by now you should know that it's an incredibly strong buy. Now let's talk about the case for Apple. The company has a big share buyback program ongoing, coupled with a price chart that looks like a ski slope from top down means that those willing to weather the storm will come out on the other side owning a greater share of this company. That’s because their board authorized the buyback program in dollar amount, so cheaper shares means more shares can be taken out of the market. Apple’s (AAPL) $90 billion buyback will pull 18% more shares out of circulation if they can deploy it at $135 (where shares are today) instead of at $160 (about where shares were when it was announced).

The bottom line is this, while we can’t call a bottom and don’t expect a V-shaped recovery, we do believe that many names are becoming more valuable as their stocks go lower, and that patience will ultimately be rewarded. Therefore, we intend to stay the course, maintain our discipline, focus on the highest-quality names, reduce the cost basis of our holdings when opportunities present themselves, and keep our sights on the long term.