12/2022 Keep Winning
Written article below.
Do me a favor and take a guess what the return has been from January 1st 2020 to December 1 2022. Seriously, what do you think it is?
If you’re like me, your memory doesn’t always recall pertinent data at a moment’s notice, so let me remind you that from Jan 2020 to Dec 2022 it seems the entire economic, health, financial, political, and geopolitical worlds all went up in flames!
We’ve had two downturns in the market of over 25%, Covid-19, high inflation matched with high interest rates, an incredibly divided government, along with Russia invading Ukraine, and most recently Bitcoin’s assumed collapse (I’m not surprised or disappointed).
So have you answered my question yet? “What’s been the return from Jan 2020 to Dec 2022?” Would it surprise you that the return is 9.98% annualized? (Yahoo finance).
Now ask yourself, what did you have to do to earn that return? For those who stayed invested and hopefully increased their investments over that period, you certainly did earn that return by standing fast in the face of incredible economic and financial headwinds. Don’t lie to yourself in saying that you “didn’t do anything” because you certainly did. You stood your ground when just about every news outlet was telling you to cash out, or worse, buy into a fad like bitcoin (in 2020, 2021, and the first half of 2022), or like buying WFH stocks like Zoom or Peloton (which are both trading close to the same price or lower prices than before Covid), or like buying meme or trendy positions like GameStop or the “innovative” ARKK etf.
Tuning out the financial media, tuning out fad investments, like the ones mentioned before, tuning out your own personal FOMO because it sure feels like everyone else is making a killing with their trendy or fad investments takes discipline. Investing in what has historically worked over the past 100 years in typically boring companies that historically return 10% annually over long periods of time takes discipline. And for those investors who took the disciplined and boring approach, I want you to be proud, because once again history is repeating itself and you won this most recent battle of staying focused with your investments.
With that said, please don’t hear me in saying that I think all the financial storms are over or fads are over because there is always a new one to be had. The current financial storm is far from over. And let me be clear, from my view, we’ve always been and will always be in a financial storm. The financial markets have never been, and I don’t believe will ever be “calm.” The very nature of financial markets includes volatility, meaning up and down price movements. This is the very nature of broad equity markets and where the historical long-term returns have been found.
You or I can always go down to your local bank and buy a CD and have certainty. You’ll have certainty that you’ll have some return that historically hasn’t kept up with inflation. In this example, what you’re doing is buying principal protection (preventing losses) and guaranteeing you’re losing purchasing power in the future. Conversely, when you buy stocks, you trade your principal protection, because stocks are not safe in the short-term, they go up and down in value. But over the long-term, they’ve shown to increase faster than cash, CDs, bonds, or inflation, so you’re able to protect and gain purchasing power in the future. (sources: NYU.edu source).
Remember that over the past 30, 50, 70, 100 years, stocks have returned about 10% (source). So what will stocks do in the next 10, 30, 50 years over the rest of our lives? No one has any idea whatsoever and if anyone tries to provide you with certainty in the financial markets, that person is certainly NOT to be trusted. This is why I encourage all investors to be long-term and goal oriented.
Additional Data: Each month I get asked by clients what additional resources I’m looking at. Please hear me in stating I’m not trying to predict anything whatsoever, just some of the interesting data I’m watching. This month’s list of additional data points is really just an update from last months. I’m looking for continued trends, which at least currently, are continuing.
- Did We Just Hit Bottom? – Was my blog post last month where I make the argument that we may have hit bottom, who knows if I’m right or wrong, it’ll take another 12-24 months to know for sure. Regardless, since the date cited, the markets are up over 14% (dates from 10/13/22 to 12/2/22 source: Yahoo Finance)
2. BLS.gov – (above chart) showing PPI 12 month percent change, notice the sharp decline
3. M2 Growth vs Inflation - Longtermtreands.net – The trend is continuing, lower M2 (black line) and lower inflation (red line)
4. Breakeven Inflation Rate - Federal Reserve – 5-Year Breakeven inflation rate of 2.51, this was in October 2.67%, this was 2.14% in September, was 2.51% in August, and 2.72% in July. When you expand the chart to the “Max” history, you’ll notice we’re just about on par with the long-term average.
5. Federal Reserve Balance sheet – The Fed is following through on it’s statement made in May 2022 of reducing the balance sheet by 47.5 billion per month in months June-Aug 2022, then reducing the balance sheet by 95 billion per month. As I’ve written since the start of the year, reducing the balance sheet and in turn reducing M2 is a key measure to bringing down inflation
Market Truths
1. The Stock Market cannot be consistently known or timed
2. The Economy (as you define it) cannot be consistently known or timed
3. Over the past 100 years, the market has returned 10.45% (with dividends reinvested). It’d be difficult for someone to achieve this return if they did not simply stay invested. Data Source
4. The average intra-year market decline is about 14% and the market drops 15% or more every 3 years. J.P. Morgan | American Funds
5. Investing in equities has historically been volatile, my guess is it always will be, however when you consider equities (using the S&P 500 as a proxy), Real Estate, short-term bonds and corporate bonds, over the long-term, equities continue to be the historical winner. To crystallize this point, just look for yourself NYU.edu.
Market Beliefs
1. Because the future cannot be known, we must embrace the belief that the world isn’t going to end during our lifetimes, and if it does, our money doesn’t matter
2. The world has continued to advance, since well before Jesus walked the earth, so assuming the world doesn’t end, it’s rational to believe the world will continue to advance
In closing: We of course cannot control what the market does from here and we cannot predict when the next market downturn will occur. But we can control our behavior to these outside events and continue to stick with our long-term investment strategy.
As always, thank you for your trust, if you have any questions/concerns please contact me.
David Hobbs, CFP®
Wealth Advisor | Owner
Hobbs Wealth Management
Standard & Poor’s 500 (S&P 500) - a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.
Russell 2000 – The index measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
MSCI ACWI ex USA – The index measures the performance of the large and mid-cap segments of the particular regions, excluding USA equity securities, including developed and emerging market. It is free float-adjusted market-capitalization weighted.
Federal Funds Rate - refers to the target interest rate set by the Federal Open Market Committee (FOMC). This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.
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