The first six months of 2022 saw the largest 500 publicly traded US stocks (S&P 500) decline of 23.5% from its all-time high on January 3rd to the years low on June 16th. It ended the first half of the year down a total of 21.08% on June 30th.

More noteworthy than the decline was that in mid-june, one-sided negativity ran the market on a historic streak in which 90% of stocks closed lower 5 out of 7 trading days (everyone was selling). The near-term economic uncertainty seems astronomical.

Regardless of all other points I wish to make, the best way to completely destroy any chance for lifetime investment success has historically been to sell one’s quality portfolio into a bear market (when stocks experience a prolonged decline). To sell when investor sentiment was so extremely negative, when everyone seems to be selling, would have all but guaranteed financial catastrophe.

Let me attempt to make some kind of sense out of what is going on here. To do so, I need to go back to the bottom of the Great Panic on March 9, 2009. From the bottom, the S&P 500 (with dividends reinvested) grew annually at 17.6% for the next 12 years through the end of 2021. This group of stocks were up seven times from their low in 2009. This was one of the greatest runs in the whole history of American stocks. Over the last three years, 2019 through 2021, encompassing the worst of the coronavirus plague, these stocks were up an average of 24% per year.

But when inflation began soaring last year, it became evident that the jaw-dropping advance of stocks over those three years had been fueled, to some extent, by excess government spending and money transfers intended to offset economic devastation of the pandemic. Simply stated: far too much money was created and left sloshing in the system far too long.

We now find ourselves having to give back some of the extraordinary stock gains as the Fed moves to soak up this excess money that was created by raising interest rates and shrinking its balance sheet.

Yes, the war in Eastern Europe and supply chain woes of various kinds from shutting down the global economy have exacerbated inflation, but creation of excess money got us into this mess and now Fed monetary policy is required to get us out. The fear, of course, is that the Fed will overtighten, putting the economy into recession (trying to predict the timing of this is impossible).

My position in all my discussions has and continues to be: so be it. If an economic slowdown over a few calendar quarters is what it takes to stamp out inflation, it would be by far the lesser of the two evils. Inflation is a cancer, and it must be destroyed.

With regard to our investment policy, nothing has changed, because nothing ever changes. That is: we are long-term, goal focused, plan-driven investors who have been preparing for these events to occur. We own diversified portfolios of superior companies; these companies have demonstrated the ability to increase profits over time, thus supporting increases in their value over time. We must remember that we’re not investing for near-term stock prices, but the long-term values of these companies.

We act continuously on our financial and investment plan; we do not react to current events, no matter how distressing they may be. After 30 months of chaos—the pandemic in its several variants, the election that would not end, roaring inflation, the supply chain mess, war in Europe and so on—we’re all understandably exhausted. That’s when the impulse to capitulate—to get to the illusory “safety” of cash—becomes strongest. That’s when the impulse must be resisted. And that’s my job.

This will pass, I’m here to talk all this through with you at any time. Thank you for being my clients. It is a privilege to serve you.