08/2023 - Nobody Knows
Full written article below.
This past month, the S&P 500 finished a little over 1,000 points or +27% above its October 12, 2022 panic low. At that moment, it was about 6% below its all-time high back at the beginning of 2022.
My question to you – did you already know this?
As I read countless financial research and commentary, I’ve yet to read a single one, or at least have memory of one that wrote, commented, or guessed the S&P would shoot up 1,000 points in about 10 months. In fact, I’ve read much more of the opposite that we’re going to crater into a certain recession.
One of the most respected Investing Strategist, Michael Wilson of Morgan Stanley and 2022 winner of the Institutional Investor’s top strategist of the year, issued a statement in the last few weeks where he had to eat some humble pie and admit “We Were Wrong” – read more here.
My guess is the difference between most market researchers and me is that I’m either smart enough or dumb enough to admit the obvious truth that none of us know the future. All market investing has to be made on the fundamental belief that the world isn’t going to end. Because if it does end, all your investments and planning won’t matter anyway. So how should someone invest for the long-term? My encouragement are long-term, diversified companies.
And no, this isn’t always an easy strategy, just consider the past few years.
- Covid-19 Pandemic and Recession: It’s impact of illness, lockdowns, and 30%+ decline in S&P 500 price in 33 days was forecasted by no one.
- 40 year high inflation: The Federal Reserve increased M2 by 40% and then the impact of inflation soaring to near 9% was forecasted by no one.
- Interest Rate increasing: To combat rising inflation, the Federal Reserve then increased the interest rates as the fastest clip in the Federal Reserve’s 110 year history. This was forecasted by no one.
- Another Bear Market: Because of the above, we went into a 25% market decline in 10 months, again, this was forecasted by no one.
- The Almost Recession: Just about everyone in financial media has been calling for a recession to have occurred already this year, but it hasn’t happened, at least not on their predicted timelines and it certainly hasn’t happened yet.
- About back to where we started: With being down 6% from the market top at the beginning of 2022, we’re just about back to where we started. No one saw this coming.
At risk of pouring it on, let me remind you that on February 19, 2020, the S&P was at all-time highs, right before the Covid-19 recession. The price then was 3,386, it’s now close to 4,500. Over these 41 months, we’ve had Covid, Financial, Political, and Geopolitical (Ukraine and Taiwan) chaos. But the world continues to turn, time marches on, and unless the world ends, I’m going to keep encouraging you to act on your long-term financial plan as opposed to reacting to current events. If we simply react as to what’s going on around us, I’m not quite sure we’d ever invest our money in the first place. (S&P 500 data provided by Yahoo Finance).
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 some of the prior months. I’m looking for continued trends, which at least currently, are continuing.
- Did We Just Hit Bottom? – Was my blog post from Nov 2022, where I make the argument that we may have hit bottom, who knows if I’m right or wrong, it’ll take another 12-18 months to know for sure. Regardless, since the date cited, the markets are up close to 17% (dates from 10/13/22 to 04/19/23 source: Yahoo Finance)
2. BLS.gov – (above chart) showing PPI 12 month percent change, notice the sharp decline, peak was in March 2022.
3. M2 Growth vs Inflation – This is something I’ve been commenting on for close to a year and a half. Yes, I’ve been in the camp that inflation is tied to M2. We won’t know if I’m right or wrong for another year or so, but I sure like what I keep seeing. Longtermtreands.net – The trend is continuing, lower M2 (black line) is now quite a bit lower and negative along with lower inflation (red line). M2 has fallen about 4% in the past 12 months.
4. Breakeven Inflation Rate - Federal Reserve – 5-Year Breakeven inflation rate is now 2.26%. When you study this chart, you’ll see it goes back to 2004.
5. Federal Reserve Balance sheet – For months the Fed was 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. But, just in the past month, you’ll see the balance sheet spike up by 300 billion with the new bank lending program.
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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