The Cure is Not Worse than the Disease
It seems the primary function of financial journalism is to terrify us out of ever achieving our financial goals by constantly shrieking about the market’s volatility. We’re being reminded of this almost hourly as the S&P 500 approaches “official bear market territory,” defined as closing 20% below its January all-time high.
Every market decline of this magnitude has its own unique causes. I think it’s fair to say that the current episode is a response to severe inflation, and the potential to which the economy might be driven into recession by the Federal Reserve’s efforts to eliminate inflation. Russia’s war on Ukraine, post-Covid supply chain issues, and the like are surely contributing to the angst, but recession vs. inflation appears to be the main event.
From March 2009 (when the stocks bottomed at the end of the Global Financial Crisis) through the end of 2021, the S&P 500 (largest 500 US Stocks) produced an average annual compound return of 17.5% per year. Over the last three calendar years (2019-2021), the S&P 500 compounded at 24% per year. This was one of the greatest runs of all time.
It’s evident that some part of that extraordinary growth in stocks was due to excessive monetary stimulation by the Government/Fed. And to that extent, we are having to give some of that gain back, as the Fed moves to bring the resulting inflation under control. We should, I believe, want them to do this as the cure (potential for a recession) will certainly be less painful than the disease (inflation).
For long-term investors, giving in to a bear market by getting out of stocks has often proven to be a tragedy from which their retirement plans may never recover. Our investment policy is founded on the idea that the only way to be reasonably assured of capturing stock returns is by riding out their occasional declines.
My mission continues: not to speculate and insulate you from short- to intermediate-term market declines, but to minimize your long-term regret – the regret that always follows a fear-driven exit when stocks resume their long-term advance, as they always have.
I continue to counsel staying the course. I’m always here to talk this through with you. Thank you for being my clients. It is a privilege to serve you.