Rise and Fall (and Rise)
June 17, 2022
It’s never fun when the market reminds us the price of admission to equity investing can be market pullbacks and volatility (sometimes very steep and very fast). The reward we receive for paying that price is the strong returns equities have provided over the long-term. The S&P 500 is currently down about 12% over the last year, however, it has averaged 10% annualized over the last 3 and 5 years, and over 12% the last 10 years.
One of the first things any financial advisor learns in this profession when advising clients is this; equity investing is for the long-term. Long-term should be thought of as greater than 5 years. The reason for this is exactly what the market is reminding us of right now, which is the stock market can be negative over short periods of time. This is why the old saying, “it’s about time in the market, not market timing” stays true. Investors start to question their investment decisions in the middle (or mostly near the end) of a correction or a bear market. Should I sell? The answer to that question is, only if you need the money right now, otherwise you’re just locking in short-term losses, and will most likely miss the rebound. Declines set the stage for further growth and usually occurs faster than anyone expects. For instance, in the middle of the 2008-2009 bear market, there were two separate days where the S&P 500 surged about 11%, as well over 9% during the monthlong 2020 bear market.
So what does the road ahead look like? The Fed will continue to walk the tightrope. They will keep raising interest rates on their quest to slow economic growth just enough to tame inflation and hopefully avoid recession. Core inflation (goods and services minus food and energy), has come down three months in a row. However, unless you walk everywhere and never eat, that statistic doesn’t mean much. The Ukraine/Russia situation along with domestic energy policy leave oil and gas prices with a very uncertain outlook. Any resolution or clarity to these situations would most likely help bring oil prices down.
After well over a decade of ultra-low interest rates, one area we feel is beneficial to our clients is fixed-income (bonds). Most of our clients have balanced accounts, both equities and fixed-income. Even though bond prices can decline when interest rates increase at a fast pace, this is only temporary if the holdings have shorter maturities. We feel our clients are in a great position to benefit from the rising rate environment we are in. Having a balanced account also buffers volatility compared to the stock market alone.
There are a lot of uncertainties surrounding the economy. You have to remember, the market is not the economy and the economy is not the market. They do not necessarily move in lockstep. The market is forward looking and cares way more about the future than what has happened in the past or even right now. Many investors feel the need to “trade the headlines”, but often times, the market has already priced that in. In the history of corrections and bear markets, those markets have consistently begun their recovery well before the worst of the economic news was released. For example, the lowest point for the S&P 500 during the great recession of 2008-2009 occurred on March 9, 2009. It was nearly two months later when the official report was released showing the economy had contracted in the first quarter by -3.92%. It’s interesting that from March 9, 2009 through the end of April the S&P 500 was up over 27%. In fact the great recession did not end until the 4th quarter of 2009, fully eight months later. By that time the S&P 500 was up over 50% from the March 9th low. The market had run up over 50% in the heart of the recession. Again, the market is forward looking.
For most of us this is not the first correction or bear market we have been through and most older investors have seen this multiple times. Each time, the markets have recovered and gone on to new highs, so hindsight has taught us that every bear market has turned out to be great buying opportunity as long as you still have a long-term investment horizon. We will continue to take advantage of the volatility through our targeted allocation rebalancing. We know there will always be negative headlines, we just have to do what a fiduciary should do, and that’s to look beyond the current headlines for the benefit of our clients.