This Time is Different
Written article below.
In the past few weeks I’ve had numerous conversations with clients all effectively stating that “this time is different.”
This current market decline is different than other market declines. That is completely correct.
Our current market decline is different than the Covid-19 recession, the Financial Recession of 2007-09, the Dot.com and 9/11 recession, the 1987 flash crash, etc. Assuming we are in a recession now, the NBER hasn’t said so, at least not yet, then there have been 9 recessions over the past 52 years.
Each recession has been different than the others. So yes, this time is different, the market is declining for different reasons. And yes, I will disagree with anyone who believes today’s economic environment is the same as the stagflation environment in the 70s. Today’s environment cannot replicate what happened in 1971 when Nixon took the US off the gold standard (only happens once), inflation surged for close to a decade (source), prime lending went to 20% (source), and the unemployment rate went to 10% (source). This all occurred until 1982 when Volcker stamped out inflation for darn close to 40 years and the S&P 500 has enjoyed compounded returns from Jan 1982 – Sep 2022 of 11.6% (source).
Yes – today’s market downturn is different than what we’ve seen in the past, but I’d argue that EVERY recession is different than the others.
But do you know what is the same?
The world hasn’t ended. The world has become more profitable, more productive, and if you invested in equities, you’ve increased your principal.
In the past six weeks the S&P 500 has declined over 16% in value and close to -24% since the start of the year (source). None of us can predict what the markets will do in the future, but if you believe the world won’t end and that the human population will weather this current economic environment, then I hope you can appreciate the thought and sentiment that these companies are on sale and potentially ripe for the buying.
Let me be clear that I do NOT want a recession to occur and yes, I am fully ready for the current downturn to change. However, if a recession is what is needed to stamp out inflation, then so be it. High inflation is a disease and needs to be treated with swiftly and with potentially painfully with side-effects.
For any client of mine, we fully expect the market to be volatile and to have ups and downs, so this present market decline is not unexpected and does not change the view of the long-term, goal oriented investor.
Risk – let me change the view and talk about risk. As the market has dropped, aggressively so, over the past six weeks, my personal view is that holding cash has now become a risk. For over 100 years in the market, there has been an inverse relationship between the price of a stock and its intrinsic value.
If you see a company with a soaring stock price, most of us think, let’s buy because it’s going up! However, as the price goes up the intrinsic value goes down. Assuming you agree with this statement then I assume you agree with the converse statement. As we watch the broad indexes incur falling prices, we should be thinking the intrinsic value is going up!
While you all most-likely agree with these ideas, it’s another thing entirely to act on them. Buying when everyone else is selling and when everyone else is saying we’re in a recession is painful.
But, this is what could be your silver lining.
Bank of America publishes a “Fund Manager Survey” to get a feel for what fund managers are doing/thinking. The chart below is from the September survey and you can see that Fund Managers are overweight equities right now, my assumption is they are thinking “now” is the time to buy (source).
This next chart is summarizing how many fund managers think we’re going to have a recession. You want to know what I find interesting? The highest marks were in March 2009 and April 2020, the months when the last two most recent recessions turned around (source). Are we turning now in 2022? Of course, no one knows for certain. However, if we aren’t turning now, my personal assumption is that we’re darn close.
With this stated if you deploy cash now, buy into a falling market, you might have regret as the market might continue its downward trajectory. However, if you hold cash until you have a clear sign the market bottom has occurred, I doubt you’ll ever invest the cash until it’s far too late.
As I see it, if you invest today, there is a risk the market could/will fall further, but I see a greater risk in being out the next advance. For example, from the bottom of the 2009 Financial Recession to 9/30/2022, the S&P 500 is up over 500% and from the bottom of the 2020 Covid Recession to 9/30/2022, the S&P 500 is up over 45%.
“Be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a shade less black than the day before.” – Jeremy Grantham March 9, 2009
Additional Data: Each month I get asked by clients what additional resources I’d encourage reading. This month I have three. Please hear me in stating I’m not trying to predict anything whatsoever, just some data I’m watching.
Peaking-Power Syndrome - Energiesnet.com – Argument outlining Russia’s aggression toward Ukraine and China’s potential aggression towards Taiwan as what could be the trigging event of their decline, similar to Germany in 1914 and Japan in 1941.
M2 Grown vs Inflation - Longtermtreands.net – The trend is continuing, lower M2 and lower inflation
Breakeven Inflation Rate - Federal Reserve – 5-Year Breakeven inflation rate of 2.14%, whit was 2.51% in August, and 2.72% in July
Forward P/E - JP Morgan – PE ratios continues to hovers below the 25 year average, which is starting to look like a base amount of support.
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.
-Dave
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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