Dear Clients and Friends,
Given the ongoing tumult in the stock and bond markets, rather than provide you a reprise of my “market/economic comments” of just seven weeks ago ("Embracing Uncertainty" 3/1/22 ), I want to offer-up some knowledge I have gained through having lived through eight bear markets over my 39 years helping clients navigate both choppy and calm waters.
The stock market now has officially logged its worst four months to start the year since 1939. A dismal statistic that is making its way around media headlines - as of intraday last Friday the S&P 500 Index touched a Bear Market level, with a 20% drop from its prior high. While that may not sound all that desperate, many astute market watchers are aware that the “broader market” is feeling even more pain. There are an astounding number of tech stocks that are 60-70% off their 2021 highs with e-commerce, fintech, and cloud software being hit the hardest. Even media super-giants, and just this week large retailers have felt the wrath of investor scorn over business execution shortcomings. The NASDAQ 100 is currently sitting nearly 30% off its all-time highs for the sake of perspective.
To add insult to injury, the “balance” usually provided by a traditional 60% stock / 40% bond portfolio, which historically has generated ballast with bonds going up in value when stocks go down, has been double-whammied. With equities down double-digits, the generally accepted index for “bond returns”, the Bloomberg US Aggregate, is also down on the year by nearly 10% as of today – via a historically large and quick decline. However, there have been safe havens, many of which are featured in the diversified portfolios of our clients…funds that feature managed futures, real estate investments and non-correlated fixed-income that have provided favorable returns to allow investors greater confidence in their investment strategy.
What’s causing all this volatility? As referenced by me in recent updates, momentum in stocks was already way out ahead of itself coming into the year and we were overdue for a pull-back. Throw in the most dramatic inflationary data in decades combined with reactive policy adjustments by the Federal Reserve, and you have a recipe for instability. Let’s not forget that there also is a war being fought on the other side of the world. In summary, it is unclear whether we are headed toward a period of healthy growth, a modest recession, or possibly even one of stagflation.
With all this lack of clarity, the question becomes, what can we/should we do about it. Here are my suggestions for your consideration:
- Think about current challenges this way: The average bear market is a 36% drop from high to low over a span of nine months. So, if equity investments are currently sitting somewhere between 15-25% off the highs (on an average basis) and are four months in, then we are more than halfway through a typical downcycle. It could be a little worse or better depending on how this event plays out, but ultimately, we are already well through a large portion of the chaos.
- By contrast, stocks gain 114% on average during a bull market. And, 78% of the time, stocks are in a rising trend, not falling. Finally, even the sagest investors know…picking market bottoms and tops is impossible, but once the recovery begins it is historically very rapid in nature.
- Diversified Investments - If you (like most of our clients) have a diversified portfolio holding numerous asset classes, and are sticking with your long-range investment strategy, it is likely that your investments in their entirety have pulled back far less than the broad markets.
- The best investors I have met over the course of my career never get too high or too low on the emotional spectrum. They always have a sense that things will ultimately work out. No one is perfect and the pain is real. No strategy is infallible. However, you must pick an investment routine you identify with and stick with that process through thick and thin. We know through experience that this level of stability and long-term commitment is what precedes a successful outcome.
- Tips for Addressing a Growling Bear:
- Turn off CNBC - We aren’t picking on CNBC for the sake of its content, but the mainstream financial media, in general, are not in the business of making clients money. They are in the business of selling advertising by gaining the most eyeballs on their product as possible. That often involves cultivating a narrative of fear or embellishing certain data points to imply that things are only going to get worse.
- Avoid the temptation to time the market – Advisors can be just as emotionally invested in their success as any client. Advisors and clients alike may constantly second guess their decisions in the face of short-term stress from falling prices or capitulate to pressure at the worst possible time. That is why portfolio changes should be (and are at WIA) predicated on evidence-based factors rather than the whims of psychology or feel.
- Utilize the sell-off to your advantage - I once heard the phrase that “the stock market is the only shop in the world where things go on sale, and everyone runs out of the store.” I’m sure you can agree with that comparison after living through these cycles in the past. One of the best ways to mitigate the impact of a bear market and continually create consistent positive action is by utilizing the price declines to your advantage. As we meet with clients, we are actively suggesting reallocations to take advantage of such opportunities.
Each bear and bull market is going to travel a unique path of price discovery, time frames, and narratives that will leave a distinguishing mark on history. However, what remains the same throughout each cycle is how investors process and react to the emotions of the journey. The greatest value we can provide you, beyond us providing effective portfolio diversification to match your personal financial needs and expectations, is to be a source of stability and resolute consistency during these disruptive periods. Please know we are here to do just that, so we encourage you to reach out to us if you feel we can be of help in any way.
We hope you found this update to be of value and are available should you have any questions. Please be in touch. Bob Webster and James Keller
The views stated in this commentary are not necessarily the opinion of First Allied Securities Inc. and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Bloomberg US Agg index definition: The Bloomberg US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.