Happy Teacher Appreciation week! As our education professional clients look longingly to the end of another school year, they may leave behind the 3 R’s for a while: Reading, wRiting, and aRithmetic. Best wishes for a relaxing summer holiday and safe travels.
What has consumed the attention of the media, the markets and most all of us this year have been the 3 I’s: Inflation, Interest rates, and Invasion. Added together, those topics spell volatility.
There’s no sugar-coating the news: the U.S. and global markets took a hit in the first four months of 2022, offering investors an experience that they haven’t been accustomed to during the long bull market: a bit of red ink on their performance statements.
There is nothing pleasant about down markets—not the anxieties they cause, not the paper losses, not the relentless drip, drip, drip of reports in the media about this or that daily downturn. The gut instinct is to stem the losses by selling before the market goes down further, but locking in losses after the fact has, historically, almost always been the wrong move. Nevertheless, many people do it, and sell to wiser investors who prefer buying their investments on sale.
The stock market suffered an ugly downturn in April, no denying that. Chances are, you knew it was coming. In fact, so did we.
Come again? Pretty much everybody knew that sometime, someday, probably before long, stocks would take a weird, unexpected plunge. The fact is, they do this more often than we realize; one-day drops of more than 2.8% have occurred 20 times since February of 2018 (down 4.6% on Feb. 5, down another 4.15% on the 8th). And we saw three in April.
What is often lost in the market punditry and gloomy daily reports is how common large declines (or “bear” markets – declines of 20% or more) have been in market history. Since 1929, there have been 28 downturns that met the technical definition of a bear market, or roughly one every 3.3 years. The 2007-8 downturn was a whopper; the markets lost just under 52% of their value before roaring back into one of the greatest, most intense bull markets in history. The short Covid-related downturn in 2020 was one of the quickest, lasting just 33 days before recovery.
The trick isn’t knowing that there will be a market free-fall sometime; the trick is knowing exactly when. Many prognosticators had a feeling that stocks would go into a long-term free-fall after those disastrous few days in the spring of 2020, when people were just realizing that Covid was going to be a thing. But the markets rewarded buy-and-hold investors. There’s a whole cadre of pundits who make a great living by predicting that investing or economic catastrophe is just around the corner, and they offer this prediction repeatedly until one day (surprise!) they turn out to be right.
If you knew that there would be a significant market drop on precisely a given day, then you had something worth talking about, and we wish you would have shared this information with us beforehand. The fact that none of us could predict the date or time is significant; it means that these market moves are completely predictable in that we know they are going to happen, and unpredictable in that we never have any idea beforehand when the hammer will fall.
But that is also good news. Just as experience tells us that the markets are going to drop periodically, it also tells us that they tend to recover to new highs later. Neither of those rather vague predictions are terribly exciting, but the second one is the one that is going to make you money in the long run. Looking at the table above, you will see in the last column that the average returns for the past three crazy years have been positive.
Consumers are doing pretty well (albeit paying more for gas and groceries). Unemployment is historically low, and wages are rising. And many businesses continue to report greater than expected profits.
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®