06/2023 - Are You Ready for the Next Downturn?
Full written article below.
Think back over the past three years or so, we’ve seen a number of rather historic events all unfold in a very short period of time.
- Global Health Crisis in Covid-19
- A 31% GDP decline and a corresponding 30%+ decline in the S&P 500 CNBC.com
- Significant monetary response that increased GDP by 33% CNBC.com
- 40% increase in money supply (M2)
- Russia invading Ukraine
- High inflation that hadn’t been seen in the past 40 years
- China threatening Taiwan
- Federal Reserve interest rate moves to slow inflation
- Another 25% S&P 500 decline
The above listed is just some of the headlines that have occurred over the past few years. My guess is, more and more storylines will occur, especially as we get closer to the Presidential election cycle. You and I both know the news media just doesn’t stop and they’ve figured out that bad news sells advertisements!
So what am I getting at? I’m getting at the reality that bad news is always going to be among us and that market volatility, defined as the market going up and down, is at least historically always among us. Don’t ever forget that in the past roughly 50 years there have been THREE market declines of about 50%. However, over the same 50 year period of time, the that same market has returned about 10% annually, even when you include all the declines. Historical Data
So as painful as it continues to be, my continued and long term encouragement for all of us is to stay invested in our core strategy of owning some of the largest and at least in my opinion, best managed companies in the United States and the World. The idea is that these companies are all in business to make money for their share-holders (people like us), and as markets change, these companies are rationally changing as well.
Please don’t lie to yourself and think another 50% decline isn’t possible, we should all plan on this occurring and even expect another 50%+ decline with some type of regularity. No, I’m not saying I think this is going to happen soon, but it certainly could and shame on all us if we’re caught off-guard.
We should also plan on the market doing what’s it’s done over the past 100+ years and that is, to be volatile and to go up in value more than it’s doing down. The alternative, doing down more than going up, would force all us to reconsider how we invest, it simply wouldn’t be rational to continue to buy into a falling investment. This is exactly why investment allocations are specific to the client, diversified and goal-driven.
Should you have any questions on your investment allocation, please don’t be shy in reaching out.
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)
- “Investors Are the Most Bearish on Stocks Versus Bonds Since 2009” – in this wonderful article from Bloomberg.com, they reference the reality of the bond market being overweight, the highest since March 2009. Why so I say this is such a wonderful article? Because to the informed reader, March 2009 was the final month of the Financial Recession and kicked off an 11 year Bull Market! Fingers crossed….
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).
4. Breakeven Inflation Rate - Federal Reserve – 5-Year Breakeven inflation rate is now 2.07%. 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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