Market Thoughts

Author: Philip Weiss | | No Comments


It’s hard not to notice that after strong returns in July and a solid start to August, the market has once again turned lower. While we never know for sure, reports of higher-than-expected inflation in August likely spurred the latest decline. On Tuesday, the S&P 500 Index dropped 4.3% after this data was released.

Tuesday’s decline marked the second time this year that the market fell at least 4% on a single day. Stocks have also declined by at least 3% nine times this year. They have fallen 2% or more on 17 occasions.

At the same time, the market has also delivered gains of at least 2% on 16 different trading days this year. The bumpy ride the market has taken investors on this year can be seen more clearly in this year-to-date performance chart.

The market’s weak performance can lead to investor angst. While I haven’t gotten many calls from clients about the market, I have gotten a handful.

I can understand why some people are concerned. It's never fun to watch your account balance fall. Unfortunately, down markets are par for the course. If there wasn't risk in investing, then investors wouldn't earn the returns they have over the long term. It's also important to consider that when we invest, we are expressing our belief that the market will provide long-term gains. Otherwise, there would be no reason to invest.

What About Diversification?

It's probably even easier to be concerned by the market's decline right now. Normally, bonds help provide some cushion against losses. But with interest rates increasing, that hasn't been the case. As shown here, all asset classes were down year-to-date through August's end other than cash and commodities. If we consider inflation, commodities represent the only asset class to provide positive year-to-date returns.

Commodities have a poor long-term track record, so they do not represent an explicit allocation within the portfolios of Apprise’s clients. Plus, if you look at the underlying data, you’ll see that higher oil prices are often the key driver of strong commodity returns.

When I was an analyst covering the energy sector, I had to forecast oil prices as part of my job. Members of the media would call and ask for my price forecast. I’d give it to them. But, first, I’d say the following: “It’s part of my job to forecast oil prices, so I’m going to give you a number. But there’s one number I can pretty much tell you won’t be the average oil price for the next quarter or year. That’s the number I’m about to give you.” There are simply too many unpredictable factors affecting oil prices for anyone to forecast them with any degree of precision.

A Look at History

It's also hard to predict with any degree of certainty which asset class will deliver the best results in a particular year. The following chart shows returns by asset class over the last 20 years. It also represents one of the best arguments one can make for having a diversified portfolio. It might not provide you with the best returns, but it can help you avoid having the worst returns.

When the market falls, it's even more important to remain focused on the long term. Reacting to down markets can derail your efforts to reach your financial goals. Remember, too, if you are currently employed and contributing regularly to a retirement account such as a 401(k), you are adding money to the market every pay period. That provides you with an opportunity to take advantage of the market's downturn.

While volatile periods like the one we're experiencing now can be intense, investors who learn to embrace the uncertainty may often triumph in the long run. That's why it's important to keep investing (or stay invested during a declining market). It would be nice if we could know to exit the market before it turns lower, but I know of no one with a successful record of timing the market.

What Happens if We Exit the Market?

If we exit the market, how do we know when to get back in? Odds are that if we exit a bad market and re-enter later when things look better, we will have weaker returns. Why? We'll miss a portion of the recovery. While past performance does not guarantee future results, on a historical basis, staying invested puts you in the best position to capture the recovery. Big return days are hard to predict, and you don't want to miss them. If you invested $1,000 in the S&P 500 continuously from 1990 through the end of 2020, you would have $20,451. If you missed the single best day, you'd only have $18,329 – and only $12,917 if you missed the best five days.

Moving your portfolio to cash will also cause you to lose out to inflation. That means your purchasing power will decline. For example, check out this chart showing the price of coffee since 1980 – including an inflation-adjusted price. In 1980, the average price of coffee was $3.14. It peaked at $5.68 in 2012. It’s fallen some since, but it was still $4.71 in 2021.

Why Do We Invest?

When it comes to investing, is your goal to beat the market, or is it to invest in a way that will allow you to live your desired lifestyle both now and in the future – including retirement? Trying to beat the market implies taking on risk. That additional risk can lead to larger losses when the market declines. Diversification can help minimize your losses in a down market. It may also limit your gains when the market rises. But limiting your losses and lowering volatility can ease your mind.

Positioning yourself to live your desired lifestyle should matter more. The life planning questions that Apprise asks as part of your financial plan are designed to help determine what matters most to you. That should be reflected in your financial plan.

Some Final Thoughts

On average, down markets last 18-24 months. That doesn't mean the market will recover within that timeframe this time, but that's a reasonable guideline. We also have a bear market about once every four-to-five years. (We're considered to be in a bear market when the market falls at least 20% from its highs.) When it comes to investing, down markets come with the territory. Knowing that doesn’t make any feelings that a falling market causes go away. But it can help ease the pain and lower the level of concern. We’ve seen this before. We will see it again.

It's important to focus on the right things during markets like this one. Your financial plan has to survive difficult times in the market. When we have a difficult market, we need to maintain our focus on what’s important. To me, that’s the long term.

The longer the volatility lasts the easier it becomes to pay too much attention to the market and not what matters. If you’re an accumulator of assets, you should view the volatility as a chance to buy at lower prices, not a risk. If you’ve already accumulated financial assets, this volatility is the other side of more than a decade of extraordinary gains in the U.S. market.

Regardless of whether you’re an asset accumulator or an asset decumulator, keep in mind that volatility – to both the upside and the downside – is an integral part of bear markets.

We can do nothing to control the volatility.

But we can control how we react to the volatility.

I hope this helps. Please let me know if you have more questions or if there is anything else I can do to help. If you’d like to talk about it, please schedule a call.

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