12/2023 - 1.2% Difference
Full written article below.
From the end of the Financial Recession, March 2009 to January 2022, the S&P 500 enjoyed compounded returns of close to 17%, put another way, a 10k IRA investment would have been worth over 70k in that time period, assuming dividends reinvested.
But since January 2022 we’ve had a rapid increase in inflation, followed by an incredibly sharp increase in interest rates by the Federal Reserve. The result? A bear market in both stocks and bonds.
The S&P 500 dropped about 25% in the following 10 months and the 10 year Treasury bond was down about 15% during a similar period. This 15% decline made unfortunate history as being the worst year ever for bonds (cnbc.com).
And of course don’t forget about the war in Ukraine coming close to two years since Russia first invaded. The war in Israel and Palestine along with Iran getting closer to nuclear capabilities. Also, don’t pass over the material fact that Iran continues to poke and prod at the US and it’s allies by attacking at least 40 times since October 2023 (Reuters.com). In a personal view, it seems Iran is just hoping for a broader US conflict as a means to distract us from Ukraine and Israel.
At home things don’t appear to be all that much better with the southern border looking as though it doesn’t exist, crime and homelessness in some US cities have gotten so bad that retailers are moving our of certain areas, more on this in last month’s newsletter, HobbsWealth.com. The US budget deficit continues to soar and march down a path that doesn’t appear to be sustainable, same with Social Security and Medicare and somehow there isn’t enough political will, at least not yet, to do anything about it. All this along with an upcoming Presidential election.
So now that I’ve thoroughly depressed my reader, let me ask a question, given the non-exhaustive list of “things” just mentioned in the past close to two years, would it surprise you to read the S&P 500 is down 1.2% from January 3, 2022 – December 5, 2023? It sure feels like that number is a misprint, it sure feels like the market would be down well past 25%, but it isn’t.
There’s some type of disconnect happening here, something isn’t adding up. Over the past calendar year, I’ve had more of these conversations than I’ve ever had in the 15 years I’ve been in the financial industry. So what might the broader market know that we “normal” investors don’t know?
The answer to this question is something we can only make educated guesses. You see, no one on this earth has ever proven themselves to be an excellent predictor of economic outcomes. If there was such person or firm or company, all our investment dollars would be managed by that entity. There has always been and I’d assume there always will be an unlimited number of views and predictions about the future, all of which are unknown. It seems most people have a crystal ball, but all these crystal balls are broken or cloudy or just plan wrong.
With all this negative news both foreign and domestic, here is my strong conviction and where I draw my hope for future investing. We don’t invest in governments or politics, we’re invested in broad, large, diversified, scrutinized, publicly traded companies that are profit-driven for their shareholders, people like you and me.
These companies realize that we can change our investment in these companies at almost a moment’s notice, so all these companies realize that if they stop providing value, we’ll take our capital investment elsewhere. We don’t owe anything to these companies, in fact, because they have our investment under their care, they owe us!
I want to make sure I’m connecting the dots. The broader market is made up of these companies I’m referencing, and these are effectively the same companies that were down close to 25%, on average in 2022. For a slew of different reasons, these companies, on average are now close to back where they were about two years ago even with all the negative headlines and unknowns about the future and if these companies lose their way or fall out of alignment, we’ll simply change our investment to a company that is aligned with a profit motive.
To me, this is one of the beautiful aspects of broad market investing. It’s the faith and conviction that the world won’t end (and when it does your money doesn’t matter), global economic progress will continue to advance just as it has over the past thousands of years, and that our belief is so high in this that we’re willing to put our hard-earned dollars behind these companies to innovate, create items, and create a profit that will be returned to us shareholders.
With that I’ll close by saying Merry Christmas!
Additional Sources: Yahoo Finance Treasury.gov
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.
- Did We Just Hit Bottom? – Was my blog post from Nov 2022, where I make the argument that we may have hit bottom, we still need another year or so to know if I was right or wrong. Regardless, since the date cited, the markets are up close to 21% (dates from 10/13/22 to 09/06/23 source: Yahoo Finance)
- Oil Exports – It’s a surprise to most that the US is the world’s largest oil producer and there’s actually 48 oil supertankers headed to the US for oil export.
- 5.9 Trillion in Money Markets – At it’s highest level every reported, there’s 5.9T in money market funds. In the investing market, this is called “Dry Powder.” These are dollars enjoying higher levels of interest than in years past. But ask yourself, what do you think will happen when/if the Federal reserve starts to cut interest rates and banks start paying less in interest on these accounts? Do you really think people will just continue to hold their funds with less interest, or do you think they’ll look for other alternatives to make money? My guess is assuming interest rates come down, these people will start to move some of these funds back into the broader market. So what do you think would likely happen to market prices if this does occur?
- BLS.gov - continued PPI reduction, peak was in March 2022.
- Breakeven Inflation Rate - Federal Reserve – 5-Year Breakeven inflation rate is now 2.09%. When you study this chart, you’ll see it goes back to 2004.
- 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 recently, you’ll see the balance sheet spike up by 300 billion with the new bank lending program but then a quick reversal. We’re now down about 1 Trillion from the peak value. Headed the right direction, long way still to go.
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, 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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