03/2023 - Unless the World Ends
Full written article below.
When will inflation come down? What’s the market going to do this year? How will company earnings be impacted by the consumer? How will the Fed change interest rates?
We all know the answer to these questions. It’s the same answer that’s always been the answer, the answer is of course there’s no way to know with any certainty whatsoever.
From where I stand, the only rational way forward is to simply embrace the reality that we don’t know what the future will hold. But so long as the world doesn’t end, believe that the companies we’re investing in, will continue to figure out how to make money.
This idea isn’t mine; it’s been made evident from history. Simply look at some of the long-standing companies that have navigated the waters of political turmoil, global wars, deep recessions, high taxation, inflation, stagflation, tariffs, etc. They figure out how to shift, change, advance and make money in the process.
Admit you’re human and because of this, the future is unknowable. However, so long as the world doesn’t end, the only rational long-term view is that the world is going to continue to advance, or at very least be stagnant, the alternative is to say the world is going to end. If that’s the case, I’m not sure you need money.
This view is ONLY for the long-term investor. This is NOT the view for any short-term trader or market-timer.
Consider another idea, what if you’re goal is to just “keep up” with inflation, which in another way is to maintain your purchasing power. Candidly, I hear this a lot, I’ll talk with a family and they’ll feel as though they’ve saved enough, and that they just need to keep up with rising costs.
Then I have to ask, what inflation number should I use? Then what about healthcare inflation? And then, what about taxes?
You see, the issue with just “keeping-up” isn’t nearly as straightforward or as simple as most are lead to believe. Let’s just assume a 3% inflation figure, then maybe another 1% on top of that for healthcare, and then maybe another 1% on top of that for a tax drag of some kind and all of a sudden, we have a 5% per annum bogey to hit, just to “keep up.”
When looking at the last 20 years, the S&P 500 has returned close to 10% and the Barclays US Aggregate Bond has returned close to 3% (source: Yahoo Finance from 1/1/2003 to 3/1/2023).
So yes, you’re reading this correct and I’m guessing your coming to the same conclusion that I’ve come to. The only historical way to keep-up with the rising cost of living, healthcare, and taxes is to keep a very heavy portion of investment dollars in very volatile and very unknowable equities.
Why am I going on and on about this? Because it seems the mainstream financial media just hasn’t figured this out. In a recent article from the Wall Street Journal titled You Might Live Longer Than You Think – they discuss what we already know, that you might live a very long time in retirement.
Well of course! To add to this, that from my experience, the longer a client lives, the more their expenses increase, typically because of rising health care costs.
Also, when you look at the primary correlations of longevity, education is the top of the list (Yale.edu). So yes, as I consult with clients, I do anticipate a long life-expectancy and I do anticipate rising costs so as a by-product, we invest heavily in equity positions.
Unfortunately, and as we all know, equities come with a bumpy ride. Since the start of 2022, the S&P 500 is down about 14% and the Barclays US Bond is down about 11% (Source: Yahoo Finance from 1/1/2022 to 3/1/2023).
If you’ve gotten this far in this current rant I’ve gone on, then I’m guessing you align with what I’m saying. My encouragement for you is to stay the course and if you have additional cash to invest, reach out to me and let’s discuss putting some of this to work.
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 12-24 months to know for sure. Regardless, since the date cited, the markets are up over 11% (dates from 10/13/22 to 02/28/23 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. M2 over the past 6 months is down 3.4%. 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 2.59%. 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 2022, reducing the balance sheet and in turn reducing M2 I believe is a key measure to bringing down inflation. I want to applaud the Fed for following through on this. I’m certainly not thrilled with the balance sheet almost being at 9 trillion dollars last April, but I am thrilled to see this continuing to come down and now getting closer to 8 trillion dollars.
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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