To say this year has been painful for investors would be an understatement.
Prior to COVID, the stock market had been in the longest bull market rally in history. After a sharp but brief selloff in 2020, the stock market continued its march upward.
So, it is understandable, after many years of persistent market gains, why the first half of this year has felt so jarring. But events are also not unexpected.
Central banks have injected historic amounts of liquidity into the financial markets, lifting asset prices and adding a safety net. But persistently hot inflation resulting from COVID re-opening, the war in Ukraine, and supply-chain bottlenecks have caused the Federal Reserve to change its tone and reverse its monetary strategy, sending the financial markets in disarray.
For the first six months of this year, investors have experienced losses in stocks, bonds, crypto currencies and other asset classes. Stocks and bonds are down in consecutive quarters, a rare occurrence in financial market history.
Aside from energy, which has benefitted from continued economic reopening coupled with geopolitical tensions in eastern Europe, the financial markets have been dismal.
There have been other times in the past when losses feel perpetual, much like today. It can be easy to get lost in the market noise when negativity and doom are pervasive. But history shows that markets can recover from seemingly dire situations. Through previous recessions, crashes, pandemics, and wars, the S&P 500, for example, has never failed to regain a previous peak and surpass it.
Amidst all of the chaos, there are some silver linings.
Long-term expected returns are now higher than in the past. Stocks have more attractive valuations; some stocks are offering large discounts from highs. A 10-year U.S. Treasury now yields 3.1%, much higher than the 0.5% low in 2020.
The University of Michigan Consumer Sentiment Index is below levels last seen in the Global Financial Crisis and the early 1980s. History shows that buying during bouts of depressed sentiment can be a good idea.
More recently, bonds have reverted back to being risk mitigators in a diversified portfolio, which is a good sign for investors who felt that there was nowhere to hide during market turmoil this year.
Consumer spending remains resilient, unemployment is low, and the U.S. economy continues to create jobs. A recession is far from a forgone conclusion. But the chance that one does occur, the underlying economy and financial system are stronger than in the past.
Market Perspective
Since 1970, a period capturing eight recessions spanning from the 1973 oil crisis to the COVID-19 sell-off, investors have been rewarded for sticking through bear markets and market crashes.
Even with this year’s pullback, the S&P 500 is up 570% from the depths of the financial crisis in 2008, 75% from market lows in March 2020, and even 16% from the market’s peak in February 2020.
To get higher investment returns over time, one must accept periodic times of turmoil and market selloffs. That is, risk and reward are inextricably linked. It is often how investors handle these situations that determines investment success.
In theory, shifting between asset classes to avoid losses seems logical. But empirically very few do it well over longer periods, likely eroding investment returns over time.
As discussed in April, missing just a few of the best-performing days can be detrimental to investment success. Even more, the best-performing days closely follow the worst-performing days when our loss aversion is likely at its highest.
For example, a balanced portfolio of stocks and bonds can be volatile in a given year. But diversification and discipline do their best work over longer time periods. Longer time periods show more manageable outcomes.
Over time, a structured, low-cost approach harnesses the power of markets to work in your favor.
What It All Means
It is normal to feel uncomfortable during these tumultuous times. It is also important to maintain perspective. Volatility is normal and should be expected. The S&P 500 fluctuates about -15% on average each year.
It is likely that there will be more volatile times ahead as uncertainty continues to loom. But how one reacts to bouts of volatility ultimately determines investment success.
Attempting to time a recession is challenging. One must not only time the recession but also a time when and how the market will react. A difficult task, to put it mildly. One could correctly time the recession but miss the subsequent rebound, which can be a costly mistake. Fortunately, investment success does not require trading around market events.
Now, more than ever is the time to lean in and stay the course with your financial plan and investment portfolio.
Let us know if you would like to discuss your financial situation.
Contact us at 865-584-1850 or info@proffittgoodson.com