The S&P 500 was down 9.2% for the month, down 4.9% for the quarter, and is down 23.9% year-to-date. The dollar hit parity with the Euro while the joke of the moment is that the British Pound is now only worth 15 ounces. The 10-year US Treasury yield kissed 4%. According to Freddie Mac, the average rate on a 30-year mortgage is now 6.7%, more than double where it was a year ago. Experts expected inflation to peak in March, then to fall in the second half of the year. With inflation at 8.3%, that hasn’t happened. Reading all these statistics can feel like drinking out of a data firehose. The only price holding steady is Costco’s hot dog and pop combo at $1.50.
This is where I say “Stick to your financial plan”, but these days you might be thinking of a famous Mike Tyson quote instead: “Everyone has a plan until they get punched in the mouth”. How did Tyson do in the fight after his quote? Evander Holyfield knocked him out in the 11th round.
There are lots of “buy when there’s blood in the streets” investors until they are bleeding themselves from that first punch. For many people, investing for the long term only means until the next bear market. Then fear kicks in and there’s a pull to get out until “things feel better”. Unfortunately, by the time things feel better, it’s generally too late. Investors need a plan in order to stay calm and capitalize when markets are down.
2022 is showing that investors can do the right thing and still have bad outcomes in the short-term. That’s ok. We aren’t investing for the short-term. Stay diversified. Trust the process. Control factors that you can control such as fees and taxes. Don’t make unforced errors by chasing returns or trying to time the market. Maintain appropriate liquidity so you are not a forced seller. If you have the appetite, you might even act as a provider of liquidity to people who are forced sellers. Either way, we encourage clients to remember what their financial goals truly are. Zoom out from the daily or weekly turmoil.
Permission to be Optimistic
Optimism is more realistic than pessimism. Predicting doom is a shallow way to sound smart, but it’s often fantasy or projection of personal insecurity, telling you more about the forecaster than about the future. A bet against a rebound is a bet on a reality that has never occurred in our stock market’s history.
TINA has left the building. When central banks were holding rates artificially low, many felt “There Is No Alternative” (TINA) to stocks. The yield on the S&P 500 was equal to or even higher than that of the 10-year Treasury. When it felt like rates couldn’t get any lower, they went negative in Germany, Japan, and Switzerland. Now, however, bonds are a viable alternative, with many yielding 4+%. For the first time in years, investors can expect a reasonable return from the bond component of their portfolios. Also, investors saving with a shorter-term goal in mind (college for the kids, a home, etc) can now earn a nice return on those savings without the volatility of the stock market.
Will the markets ever get back to where they were to start the year? In all likelihood, yes, and maybe faster than expected. We are 8 months into a bear market which doesn’t sound like much except that the average bear market only lasts 20 months. If it takes the S&P 500 a year to get back to January’s high, the return during that year would be over 35%. If it took twice as long, it would require an annualized return of over 17%. Even if it takes five years, it will mean we’d see about 8% annualized returns over the next five years.
The S&P 500 has now declined by 25% or more nine times since 1950. In the previous instances, returns have averaged 83% over the next five years and 214% over the next ten years. Past performance is no guarantee of future returns. But to-date, market downturns have been great opportunities, not catastrophic events.
This doesn’t mean we expect things to turn around tomorrow or next week. No one rings a bell at the bottom of the market. Expect negativity even when the market eventually rebounds. But take this as permission to be optimistic. Investing is about the future, not the past. It’s hard to feel this given the news around us, but with bond yields higher and stock values lower, the future outlook is improved.