When I write this newsletter during market downturns, I always like to commend the overwhelming majority of clients who stay strong during market uncertainty and volatility. The S&P 500 fell 13.7% from its top on January 4th (my birthday) and bottomed on March 8th. Was this the bottom of the current cycle of market volatility?

We have no idea. However, we are encouraged by the market’s positive 7.5% return (the market was up nearly 11.5% from the bottom just a few days ago) over the last few weeks. Historically, past upward moves that have occurred this quickly typically portended good returns in the following 12 months. We are still about 7% below the all-time highs (the more you lose in percentage points, the more it takes to get back to even), but we are hopeful that corporate earnings will continue to shine, and consumers will continue to drive the economy forward.  

Another issue for portfolios has been the performance of bonds. The Barclays Aggregate Bond Index is down about 7% this year. Normally, when we have stock market pullbacks, bonds provide ballast by rising as stocks fall. So, even conservative investors’ portfolios have been hit hard.

There are some big headwinds ahead of us to be acknowledged. They include geopolitical risks, inflation, the Federal Reserve (Fed) raising interest rates to reduce consumer demand, and continued waves of Covid that are causing full reopening delays to economies around the world. However, in the US, the driver of the economy is the consumer, and the US consumer may be in the best financial situation they’ve been in, possibly ever.  

CHART ONE and TWO: Source: BEA, J.P. Morgan Asset Management

The household debt service ratio, the percentage of disposable income used to pay off debt, is at a historical low. Household net worth is at an all-time high. Add to that, an unemployment rate near pre-pandemic levels with over 11 million job openings across the US creating a situation where consumers are in the catbird seat, so to speak.

CHART THREE: Source: U.S. Department of Labor, J.P. Morgan Asset Management

The US consumer makes up about 70% of Gross Domestic Product (GDP). If the consumer is healthy, it’s hard for the economy to get derailed. Now, inflation may take a big bite out of consumers’ wallets, but if there has ever been a time that the consumer can withstand higher inflation, it’s now.

Dealing with the Wall of Worry

“There are two ways to prepare for wild times: You can expect them to come, or you can predict when they’ll come. The former is realizing that throughout your career things will occasionally get wild (“Expect about two recessions per decade, on average.”) The latter is predicting that things will get wild at a specific time (“A recession is coming this year.”) The former isn’t hard and helps, latter is extremely difficult and often backfires.”  — Morgan Housel, again

I can quote Morgan all day. In fact, I encourage you to read the whole piece I pulled his quotes from: collaborativefund.com/blog/when-things-get-wild

This second quote deals with the “what ifs” of investing. There are a lot of “what ifs” out there right now. What if inflation jumps up to 10%? What if it stays high for a year? What about two years? What if the US or NATO intervenes in Ukraine? Will that lead to World War III? What if the Republicans do this? What if the Democrats do that? I’m here to tell you that predicting these things is a challenge. And even if you could predict correct answers to these questions, you’d still have no clue how the market will react.

Many investors have asked themselves these questions over the past few months. As a result, a few have pulled out of the market fearing the answer to these “what ifs.”  As I write this, the market has popped up around 7% from the recent decline. Did these investors get back in? Let’s say the market falls another 20% from here. Do you think the people who sold their positions will feel better about the prospects of the market when it’s down that much? Will they have the courage to re-invest at the lows? More likely, they’ll wait till they feel better. However, by then, the market will have likely risen anticipating a brighter future.    

We are dealing with the Wall of Worry every day we invest. The best way to overcome it is to have a plan. Find out how much you can save, how much you need to live on, and how much return you need to make those things last your entire life. Then, you need to assess how much risk you’re willing to endure. The lower your risk tolerance, the less return you can expect to make over time. If you’re not able to handle the Wall of Worry, there won’t be much gain for you on the other side.

Ultimately, consider yourself fortunate. If you’re reading this, you’re likely already working with a KWB Wealth advisor or you have an interest in working with a professional. That’s a great place to start. You’re ahead of the game.   

As always, if you have any questions, please contact us and stay safe.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly

The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Investing involves risk including loss of principal.

No strategy assures success or protects against loss.  The economic forecasts set forth in this newsletter may not develop as predicted and there can be no guarantee that strategies promoted will be successful.