Challenging Markets and You
“This is my 10th bear market. I’ve been asked how this compares to the past. Like the other nine, they are never the same except that they are very unpleasant.”
-William H. Hurt, Capital Group Portfolio Manager, (1927-2021), circa 2009
Surely Mr. Hurt, this bear market is certainly not the same as any of the recent past unless you can somehow vividly recall the bear market of 1980-1982. Many of you would use a different word than “unpleasant” to describe this current market downturn. We recognize that there are many issues facing global markets – inflation not seen since the latter 1970s, FED rate hikes, the Ukraine war, China / Taiwan tensions, and the upcoming government debt ceiling showdown. It has often been cleverly said that the markets climb an ongoing “wall of worry.” And with our combined 75+ years of investment experience at SWFG, we surely know it feels rotten to most all of you.
Perspective
As of 9/26/22, the year-to-date results were the following for equity markets:
DJIA > -19% S&P500 > -23% NASDAQ > -31% EAFE (Non-U.S) > -28%
The way the equity markets are behaving, one might think that some of the world’s largest and most profitable companies are suddenly becoming dramatically less valuable. Are they all laying off workers, slashing prices, closing factories and declaring imminent bankruptcy? None of that is happening. Stock prices have never been a precise indicator of what companies are worth. With interest rates being as low as they were for as long as they were, stocks were priced on the higher end of fair value. Now investors are not willing to pay as much for the future earnings of these companies at a higher discount rate.
A 20%+ decline in the equity markets typically occurs at least every 5 years. For those in need of more perspective on this, please read “Your Portfolio Value and Gymnastics” and “Crying in the Middle.”
The equity markets being down like they are is not surprising, but the bond market being down more than 12% makes this the worst bond market since at least 1980.
Bloomberg Aggregate Bond Index YTD results as of 9/26/22 > -14%
It is uncommon for stocks and bonds to be down in the same year especially in such a spectacular fashion for bonds. And with bonds down like they are it makes the YTD investments results for portfolios for our retired clients down more than they have seen in quite a while. This is unnerving. Though we believe most of the carnage has already occurred in the bond market.
Why the meaningful negative investment results?
- The reasons for bear markets are seldom rational—which, of course, is why bear markets end and stocks return to (and always, in the past, have surpassed) their original highs.
- What’s happening right now is not unlike what happens when one of our children is diagnosed with an illness, and the remedy is a daily dose of some awful-tasting medicine. The illness, in this case, is inflation, which absolutely has to be cured if we are to experience a healthy economy and future positive investment results. The FED has made clear that they will bring down inflation.
- Few things are worse than having the money you’ve saved up deteriorate in value at double-digit rates, which is precisely what has been happening this year.
The cure, which any child will tell you is more unpleasant than the illness itself, is the U.S. Federal Reserve (and other central banks) raising interest rates, which is its way of reducing the amount of cash sloshing around in the economy. Rising consumer prices, just like rising stock prices, come about when there are more buyers than sellers. Reducing the available cash reduces the number of buyers in relation to sellers (ironically, both in the consumer marketplace and on Wall Street), and finally slows down the inflation rate to manageable levels.
We can already see this working in the housing market, where, just a few short months ago, multiple would-be buyers were bidding against each other to pay more than the asking prices. As mortgage rates have risen, the frenzy has completely dissipated. The process takes longer in the consumer marketplace at large, but it is working behind the scenes.
Doesn’t less spending mean less economic activity? Doesn’t that lead to a recession? The answers, of course, are yes and likely. But at this point, we believe a recession might be exactly what the economy needs. Recessions act like a cleansing mechanism, exposing/eliminating waste and inefficiency. The labor market has been out of balance since COVID-19 came on the scene in 2020. A recession would help to get the labor market back in balance which is imperative to reduce inflation. Ultimately, a recession, will create a healthier economy when we come out the other end.
A similar period to our current situation was a 27% equity market decline from 11/28/1980 to 8/12/1982. Inflation was more entrenched back then and the FED Chair, Paul Volcker, and the FOMC drastically raised interest rates to reduce that inflation. This caused not one, but two, recessions during this period. It also set up very admirable investments results for many years in the future.
What to do Now?
- Stay away from the noise – NOT listening to the media and financial media. The media is in the business of selling advertising, not sound financial advice. As we often say, “the media is 24/7, but you are not obliged to consume it at the same rate.”
- Stick with your allocation – making changes now will only be harmful in the long-term. Attributed to many, including Warren Buffet, “Your money is like a bar of soap – the more you handle it, the less you will have.”
- The equity markets are likely to be volatile through the rest of this year.
- For those of you with taxable accounts (Non-IRAs), we are actively harvesting losses where appropriate to lessen your 2022 tax liability. Additionally, we are rebalancing accounts to buy when equities are lower.
- Retirees – delay non-essential expenditures until the markets recover.
- Pre-Retirees – Speed up your investments into your 401k, 403B or other retirement plan to take advantage of lower equity prices.
Right now, we’re taking our medicine, and boy does it taste awful. Anybody who has come down with a bug and taken medicine to cure it knows that the former unpleasantness doesn’t last forever, and therefore neither does the latter.
Thank you for the trust and confidence you have placed in us and giving us the opportunity to provide education to you on your financial journey.
As always, thank you for the introduction of your friends and family that so many of you have made. We are honored to serve you! As a service to our clients, we are happy to act as a sounding board for your friends and family. If any of them should need a second opinion on their financial situation, introduce them to www.striblingwhalen.com or call us at 678-989-0048.
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Regards,
Warren D. Stribling, IV, CFP®
Principal
warren.stribling@striblingwhalen.com
Brian E. Whalen, CFP®, CIMA®
Principal
brian.whalen@striblingwhalen.com
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Source:
https://www.nytimes.com/2022/05/14/business/inflation-interest-rates.html
