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“Endless bad news you can’t
look away from amid slowly compounding improvements you barely notice.”
– Morgan Housel

All the market’s advances created the past two years have been erased in the first nine months of 2022. This isn’t comfortable by any means…but it’s what one does from here that can make a difference in the future. In many ways, this downturn has felt more brutal than the Great Recession (also known as the Financial Crisis) of 2008-2009. During the Financial Crisis, unemployment was skyrocketing, corporate earnings were crushed, real estate prices were tumbling, and banks were failing as the economy ground to a halt. Fundamentally, a recession made sense given the circumstances. However, things are very different today. Unemployment is at nearly historic lows, with help wanted signs everywhere. Corporate earnings are slowing but estimates for the 4th quarter are still positive. Up to this point, while Gross Domestic Product (GDP) was mildly negative in the first two quarters, it’s estimated to grow approximately 2% in the 3rd quarter. So why are markets behaving so poorly? Bewildering to say the least.

There’s lots of commentary on why things are bad, how it’s different this time, and why it may get worse before it gets better. However, at the beginning of the year all the commentary was for a positive 2022 as analysts predicted continued economic and earnings growth with mild transitory inflation. The “smart people” were wrong then and could be wrong or too pessimistic now. Truth is, no one can predict macro-economic outcomes as there are just too many forces and factors impacting the outcome.  

However, there are a few things I do know and believe are predictable, and it’s times like these when returning to the basics can provide some perspective. The reflection can help reset the moment and hopefully, produce some light in a cloudy and uncomfortable environment. The things I know:  

1.  Predicting the market  is impossible.

At the beginning of the year, banks and investment firms share S&P 500 year-end targets. Inevitably, the estimates consistently seem to predict the market will return somewhere between 8-12%. Why do most estimates fall in this range? It’s the historical long-term annual return for the stock market. This year was no different; similar estimates were shared, yet now we are experiencing actual negative market returns and the sentiment has pivoted. Throughout the year, companies have dropped their year-end estimates, some finally doing so in recent weeks as the Fed aggressively raises short-term rates to combat inflation.   

We are not day traders, market timers, or clairvoyant. We build financial plans that encompass market cycles, because market corrections and bear markets happen, and market movements are impossible to predict in the short-term. However, the market is predictable over-time, and it is how one acts in challenging times that will make a difference in the future.      

2.  Patience will be rewarded.

Our team meets every Monday to talk about the markets and our business. In times like this, the younger team members look to Kerry and Robert for the knowledge and fortitude to make it through challenging markets. Here are some of my favorite notes from our most seasoned advisors:

Kerry: “Looking back, my biggest regrets have been when I capitulated, gave up, got scared and impatient, and sold. The reason … things always get better. I have chosen to not let a moment in time impact the rest of my investment life.”  

Robert: “Markets are always volatile. In times like these, I tell my clients to be patient and they will be rewarded. I also tell them that I will not be right every time, but I will be right over time.”

Kerry: “The past speaks for the future. How you participate and benefit is entirely up to you. But, based on history, in the not-too-distant future the markets will likely rebound substantially and dramatically outperform other assets like cash and bonds.”

They’ve both been doing this since the 80’s. They lived through 1987, 2000, 2008, and 2020. The markets have bounced back every single time.  

3.  When people feel the worst, it's the best time to buy.

Market participant sentiment has historically been a counter indicator for future market performance. Right now, people are extremely bearish. Recent surveys show sentiment readings at or near the same level of bearishness that were reached in the depths of the Great Recession. Warren Buffett says, “Buy when there’s blood in the streets.”  Well, the boulevards are downright covered. So, don’t capitulate now; find your opportunity in this bearish environment and hold patiently like Robert advises.

Source – www.chartoftheday.com

4.  Forward returns just got better.

The industry standard portfolio is referred to as the 60/40 – 60% stocks and 40% bonds/cash. For most investors, this portfolio aligns with returns needed to sustain a healthy retirement and the risk tolerance that most investors can stomach. For many years, the 40% invested in bonds/cash has been yielding zero. As the Federal Reserve has raised rates this year, the yield for that 40% has now reached around 4%. So, by simple math, returns for the 60/40 have just improved by 1.6% (40% x 4% = 1.6%). That says nothing about what stocks can do moving forward, but stocks are now at a significant discount (and by definition have lower risk than at the peak) from where they were nine months ago. Opportunity is knocking for those willing to answer.

Source – www.awealthofcommonsense.com

Could the market go lower? Yes. Could the market bounce around its current levels for the next few months? Yes. It’s impossible to predict the short-term moves the markets might make. Just remember, we are planning for years in the future. In our mind, there is significantly more upside available over the long-term than there are risks of more downside in the short-term.

I put this quote “Endless bad news you can’t look away from amid slowly compounding improvements you barely notice.” at the beginning of newsletter because it perfectly encapsulates how I feel today. The fear from the bad news, market volatility, and predictions for where we’re headed are hard to ignore. However, those small, incremental improvements that are going on underneath the surface of the economy are why I can stay long-term bullish. It’s normal to be worried in the short-term and still believe things will be better down the road. After all, this is what has happened in every single downturn in history. Investors who have had the fortitude to stay the course, stay diversified, add when opportunity knocks have been rewarded every time Mr. Bear came into town. Knowing that, and the animal spirits of humans, is why I will continue to be a buyer of stocks.

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

What we are listening to:

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.