Please allow me a moment of silence as I commiserate over the impending end of another football season (the Super Bowl is only three weeks away). Thanks, I feel better.
Of course, the end of football season puts us smack-dab on the middle of Snowbird Season – and for those of us that live here year-round…well, enough said on that.
Because it is an unseasonably dreary day, I decided to dive into my “geek world” and shoot out a note to you all. Grab a cup of coffee – you may need it.
ZOOM Webinars for Clients
We are excited to announce that our next Zoom webinar will be Wednesday, February 23, at 5:00.
Have you ever wondered how and why we construct portfolios (and invest our own money) the way we do? There are as many investment approaches out there as there are financial advisors. Some work, some don’t. But through years of research and due diligence we have found that there is no doubt that passive index investing has outperformed active investing over the long-term. So, we have decided to share our philosophies and methods for using indexes and why we think that approach is superior to many others.
Please join John (and I) as he presents the nuts and bolts of the RFPS Investment Planning Strategies.
If you are interested in attending, please email us at Inquire@RealityFinancialPlanning.com and John will send you the ZOOM meeting details.
As an FYI, all our past presentations can be found in the Media & Posts tab on our website www.realityfinancialplanning.com. If there are any other topics for which a Zoom presentation would be relevant to you, please let us know.
Market Review – Bear or No Bear? Does it matter?
For all the market pundits that were whining about the fact that we have not had a “correction” in nearly two years (decline of >10%), their wait is over – at least on the NASDAQ.
In U.S. stock market history, bear markets—defined as a drop of 20% or more for a broad market index—happen roughly every four years and eight months. With a couple of recent down days in the markets, those same bloviators are telling us we may be in the early stages of a new one.
Or we may not—and that, of course is the problem. It is very easy to see these market downdrafts in retrospect, but impossible to know when one is occurring, or to predict them in advance. Nor can we know how far down they will take us or when the recovery will begin.
Some of the longest declines were triggered by major geopolitical events—such as the attack on Pearl Harbor that pulled the U.S. military into World War II (a 308-day downturn, nearly a year), and Iraq’s invasion of Kuwait in 1990 (108 days). The terrorist attacks of 2001 and the North Korean missile crisis of 2017 also triggered market declines. In 2008, the collapse of Wall Street speculation nearly brought down the entire global economy. More recently, in 2020, the emergence of a major global pandemic caused a rapid decline which was, as most of us remember, followed by a precipitous rise in market values that has continued through the end of last year.
Now, it’s not easy to see a major catastrophic trigger that would cause investors to race for the exits, but there have been other bear markets where a bull market simply ran out of steam—a recent example is the bursting of the dot-com bubble in 2000. The hardest-hit investors in that period were all crowded into the latest craze—tech stocks—and the tech-heavy Nasdaq index didn’t recover its former value until 2015. The lesson there was not trying to time the market but to maintain the discipline of diversification despite the temptations of rising valuations.
Which brings us back to the possibility that we’re entering a bear market today. Taking another look at history, since 1929, the average duration of these 20%+ downturns is 21 months—and it is just as impossible to predict these durations as it is to predict the downturns to begin with.
The Covid-related downturn in 2020 is a terrific example of how unpredictable the recovery can be. The pandemic news didn’t change from February to April 2020, but the markets recovered anyway, and were not discouraged through the ensuing political drama, the Delta and Omicron variants, and the highest inflation rate in decades.
The Federal Reserve gets all the blame and all the praise when markets decline or rise, as they set the interest rate policies. One of the major fears sighted for the latest volatility in the market is that an increase in interest rates (as has been proposed) will make lending more expensive for the tech companies looking to raise capital to fund growth projects. (Crazy insight – the 10-year treasury rate went from 1.63% at the beginning of the year to only 1.75% as of Friday (Treasury.gov)).
The most important historical fact is that every bear market in U.S. history has been followed by new highs. Since 1950, we have experienced 53.8% up days in the market and 46.2% down days, and the magnitude of the positive days has exceeded the magnitude of the downdrafts. The champion investors always have some cash or cash-equivalents in their portfolios, which lets them buy when the markets go on sale—which is perhaps the best way to view bear markets: as an opportunity to buy valuable stocks at a discount.
They also do not make panicked moves or portfolio changes. Patience IS a virtue.
Though the market pundits finally got the 10% decline that they have been espousing for two years, remember that a broken clock is right twice a day.
Risks never completely abate. Certainly, inflation may be a concern and the Fed COULD move too quickly. Another variant could be discovered next month. And Tom Brady could retire.
Are we overly concerned about markets now? Not really. Always remember our focus is the long-term. If there is a major reason to do something, we certainly will respond accordingly. For now, just enjoy yourselves waiting for traffic to go back to “normal”.
As always, thank you for the trust and confidence you place in us. It is something we never take for granted and sincerely appreciate. Please do not hesitate to reach out whenever you have questions, concerns or whenever we may be of service to you.
Joe Downs, CFP® & John Cunningham, CFP®