It seems that the primary function of financial journalism is to terrify us out of ever achieving our financial goals by shouting about the market’s volatility. We have been reminded of this almost hourly as the markets started selling off in early January, as it became clear that the Fed was actually going to fight rapidly rising prices (after finally acknowledging that inflation was NOT transitory). Now, as the S&P 500 approaches “official bear market territory”, defined as closing 20% below its January all-time high, the noise from the media is only getting louder.
Every market decline of this magnitude has its own unique precipitating causes. I think it’s fair to say that the current episode is a response to two main issues: severe inflation, and the extent to which the economy might be driven into recession by the Federal Reserve’s aggressive efforts to root out said inflation. (Russia’s war on Ukraine, supply chain issues, among others, are surely contributing to the angst, but recession vs. inflation is the main event, in my judgment.)
I look at it this way:
From March 9, 2009 (when the equity market bottomed at the end of the Global Financial Crisis) through the end of 2021, the S&P 500 produced an average annual compound return of 17.5%. Indeed, over those last three calendar years (2019 – 2021), despite a hundred-year global health crisis that impacted millions of people worldwide, the index compounded at 24% per year. This was one of the greatest runs of all time.
However, it appears that some part of that extraordinary rise in equity values was due to the combination of excessive monetary stimulus from the Federal Reserve Bank and overly generous fiscal stimulus by the Federal Government. To an extent, we are giving back some of that gain, as the Fed moves to bring the resultant inflation under control.
We should, I believe, want them to do this, even if it means the economy slows. In the long run, the cure (a possible recession) is not more painful than the disease (long-term inflation). For those of us who are old enough to remember year after year of high inflation in the late 70’s and early 80’s, you know what I am talking about.
I also understand what it feels like to see your accounts decline during times of volatility and dislocation such as this. Remember, the advisors at Impel Wealth Management eat their own cooking. Our monies are invested alongside yours in the same portfolio allocations and holdings that you own. After nearly 35 years of doing this, I know the disheartening, albeit temporary, feeling of seeing your account values go down. However, I also know that acting on those feelings is one of the worst things that I can do for my family’s wealth goals.
For long-term investors, capitulation to a bear market by fleeing equities has often proven to be a tragedy, from which their retirement plans may never recover. Our investment philosophy is founded on acceptance of the idea that the only way to be reasonably assured of capturing equities’ premium upside returns is by riding out their occasional declines.
For context, check out the chart below. It shows that prior to our current downturn, the stock market, as measured by the S&P 500, has experienced six previous selloffs of –10% or more just since January 2010. Be assured that during each of these episodes, the media and the internet were full of stories about the nextend of the world as we know it.
Impel Wealth’s mission continues to be helping our clients accumulate the resources to make a successful transition from work life to a retirement of significance. To do this, we must focus on what we can control. Remember that nobody reading this controls the short-to intermediate-term gyrations of the financial markets. However, we can control our asset allocation, our risk profile, and our emotional response to these daily swings.
Our ultimate goal is to help minimize your long-term regret – the regret that has always followed a fear-driven exit once equities resume their long-term advance, as they always done before…see below.
Geopolitical Conflicts Have Had Minimal Impact on Long-Term Equity Performance
Growth of $10,000 in the S&P 500 Price Index (1940–2021)
Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. Data shown does not include the reinvestment of dividend payments. Data Sources: Morningstar, Ned Davis Research, and Hartford Funds, 3/22
We strive to align your portfolio with your long-term goals and financial plans. If your plans and goals have not changed, we would continue to counsel staying the course. We are always here and stand ready to talk with you about your particular situation. Thank you for being our clients. It is a privilege to serve you.
© 2022 Jesse Hurst
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
The views stated are not necessarily the opinion of Cetera 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.