Publication Date: March 2, 2023
This seems to be the question most investors are asking these days. And the answers are all over the map. Some people are saying we’ll have a significant market drop in the next few months that rivals the one that happened in 2000.[i] Others are telling people to just stay the course.
Here’s what I’m hearing that resonates with me most.
Investor, Charlie Munger, was Warren Buffet’s longtime partner at Berkshire Hathaway. He said, “Warren and I don’t focus on the froth of the market. We seek out good long-term investments and stubbornly hold them for a long time.” Every investor needs to be patient in a world full of “foolish gamblers” if they want to be successful, Munger went on to say. “Patience can be learned. Having a long attention span and the ability to concentrate on one thing for a long time is a huge advantage.”[ii]
If you want a deeper dive, read on.
Since 1942, there have been six drawdowns of 30% or more for U.S. stocks. The shortest drawdown lasted just 1.1 months (COVID-19 pandemic), while the longest was 18 months (Tech Bubble).[iii]
What happens after a drawdown? Historically, the market expanded over the next seven years and delivered a total return of 225%, on average. On average, during those big drops outlined above, the market declined 43% for 343 days (less than a year). That meant your accounts were nearly halved over the course of a year! That’s both scary and painful.
And if home values continue to decline due to the slowing market, it can feel like your worth…or net worth…is suffering.
But historically, drawdown time was followed by an average six and a half years of market expansion!
This is not a prediction of what will happen in the future as past performance is not a guarantee of future performance; but it does offer some perspective.
What we know is that the Federal Reserve is going to meet in March and in May and is expected to raise interest rates .25% at both meetings.[iv] There is even talk of raising rates in July’s meeting. The goal of these rate hikes has been to bring down inflation. The Fed was clearly late to the game in influencing monetary policy, which I believe has largely contributed to the economic place we're in now.
If we continue to see strong consumer spending, growing consumer debt, and a robust labor market, we’re likely going to continue to see rate hikes. This means your dollar won’t go as far, and with the worsening home market your home value may decrease even further.
If we’re going to get back to the Fed’s goal of inflation that’s 2% or less, it may be a bumpy ride to get there.
The S&P 500 fell 2.61% in February 2023, wiping out nearly half of its gain year to date.[v]
Still, City National Rochdale writes, “The US economy continues to remain best positioned against these global headwinds, however, higher inflation and rising borrowing costs have already taken a significant bite out of economic activity. With the Fed remaining committed to reining in inflation, we now believe the overall risk of recession in the US has risen to 75%. Nevertheless, the argument for a relatively short and shallow recession is strong. Inflation trends are finally moving in a favorable direction, household balance sheets remain healthy, labor demand continues to be resilient and banks are well capitalized. All of these factors should help mitigate the risks of any downturn in the economy turning into a deeper recession.”[vi]
I’ll end with this…
Your balance sheet is not your worth. Your home value is not your worth. There is so much more to your financial picture than those two things. Don’t make the picture worse by spending and going into debt. It seems many people are still spending like it’s the end of the pandemic. Patience and diligence will help you remain focused on your goals. Rate of return will not outpace savings rate, so save all you can. If you’re going to chase anything, chase after getting lean and mean with your cash flow, and maybe even consider taking advantage of “buying low” to catch future upswings in the markets.
If you’re looking at your accounts and have concerns over the way you’re allocated, please let us know. We’ve worked with our asset managers to help ensure accounts are still efficiently allocated for the goals each of our clients has set. And we’re currently scheduling annual reviews to make sure everything is in alignment.
[i]https://www.marketwatch.com/story/stock-markets-will-drop-another-40-as-a-severe-stagflationary-debt-crisis-hits-an-overleveraged-global-economy-11664823521 - 3/2/23
[ii]https://www.marketwatch.com/story/here-is-the-wit-and-wisdom-of-charlie-munger-warren-buffetts-99-year-old-investing-partner-63ca0b90?mod=home-page – 2/27/23
[iii] First Trust, Bloomberg Daily returns for the S&P 500 Total Return Index from Apr. 29, 1942 to Mar. 31, 2022.
[iv]https://www.reuters.com/markets/us/goldman-sachs-now-expects-three-more-fed-rate-hikes-2023-2023-02-17/ - 3/2/23
[v]https://seekingalpha.com/news/3942988-sp-500-ends-tough-february-with-a-nearly-3-fall-on-inflation-data-fed-concerns - 3/2/23
[vi]https://www.cnr.com/insights/speedometers.html - 2/27/23
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This material is intended for general use. By providing this content Park Avenue Securities LLC and your financial representative are not undertaking to provide investment advice or make a recommendation for a specific individual or situation, or to otherwise act in a fiduciary capacity. Data and rates used were indicative of market conditions as of the date shown. Opinions, estimates, forecasts and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. Past performance is not a guarantee of future results.