12/2024 - 29% Higher and Black Monday
Full written article below with sources.
Disclaimer: Because of the increased regulation and compliance in the financial industry, I want to start with saying everything in this newsletter is based on my opinion and is not predictive in any way.
From the beginning of 2024 to Dec 4th, 2024, the S&P 500 has ripped higher by about 29% sourced from Kwanti.com.
As I talk with some clients, they make a statement about how great the market has done this past year, and it certainly has.
But would it surprise you to learn that in the past 30 years, there have been nine years where the S&P 500 return was over 25% (including 2024)? Source with full disclosures: JP Morgan
Would you be further surprised to learn that since 1994-Nov 2024 the S&P 500 had two different 50%+ declines along with a 33% decline in 2020 and another 23% decline in 2022, yet still returned close to 10.5% assuming dividends reinvested? Source
Forgive me, but let me pile this on, because during this period of time the S&P 500 price increased by over 1,200%, dividends increased by over 550%, yet Consumer Price Index only increased by about half at 215%.
Ah – but don’t let me or anyone else lull you to sleep with all the good news, because buried within all this data from the last 30 years is the grim reminder that to enjoy these historical returns, one must bear a very heavy burden of market declines.
Everyone, including myself, wants every year to be like 2024. But we all know this is far from reality. In fact, the average intra-year decline in the S&P 500 is about 15%.
Just as we plan on the market moving higher, we also must plan on the market moving lower.
If you can bear with me for a few more minutes, there’s another point I want to make with market volatility. As we get further away from the market crash of 1987, there’s a risk of forgetting our history. We certainly don’t want to follow the phrase from George Santayana… “Those who cannot remember the past are condemned to repeat it.”
Stock Crash of October 1987
On Monday, October 19, 1987, the Dow Jones Industrial Index declined 508 points, or 22.6%, this was the largest one day percentage decline in history. The crash on Wall Street wasn’t just contained to the U.S. – this decline reverberated around the world. The projected total global decline exceeded 1 trillion dollars, in today’s money, a similar decline would be about 20 trillion in value.
While October 19, 1987 gets all the attention, the problems actually started a few days earlier, on the preceding Wednesday October 14, 1987, with a 15 billion dollar trade deficit report, rising yields on long government bonds of over 10% along with a declining dollar, all in all this caused a 4% decline.
Then on the following Thursday and Friday, the Dow dropped another 7%. With the bad news looming, investors were increasing the total amount of sell orders, so much so that this overwhelmed the financial markets. The selling continued during the weekend in the overnight markets. The total sell volume spilled over from Monday and into Tuesday, which is now called “Terrible Tuesday” as the financial markets almost ceased to function.
What’s frustrating to historians is that the crash of 1987 wasn’t from any one specific reason, like a declaration of war, bankruptcy, etc… it was from a culmination of events.
In reality – this significant market decline wasn’t forecast. There’s little history on any market forecaster who saw the 1987 decline occurring. One such individual was Robert Prechter who did correctly forecast this decline. However, since getting the call right in 1987, he really hasn’t gotten any other prediction correct.
What’s the moral of this short history lesson?
We don’t get to predict the market
When we want the market positive returns we also have to be ready for the market declines
Historically, the more serious recessions are the ones we don’t see coming… just think about the 1987 decline, the dot-com and 9/11 attacks, Financial Recession, Covid-19
So if you’re reading this and you want to participate in the long-term results of the capital markets, you also have to participate in the normal declines in the capital markets.
Or to put another way, as R. Buckminster Fuller famously phrased: “When you pick up one end of the stick, you also pick up the other.”
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.
- Should I invest in Stocks, Bonds, or a Mix? – This chart from JP Morgan shows the comparison of returns in different asset categories over different periods of time. My favorite time period? Look at the 5 year numbers, the downside on all Stocks versus all Bonds is almost identical, yet the upside is far from the same.
- Trillions in Money Markets – At it’s highest level ever reported, there’s now 6.5T 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?
- Breakeven Inflation Rate - 5-Year Breakeven inflation rate is now 2.35%. When you study this chart, you’ll see it goes back to 2004.
- Federal Reserve Balance sheet – The Fed continues to follow through on it’s statement of reducing the balance sheet. We’re now down to $6.9T dollars in the balance sheet, last time we saw this was May 2020 levels and declining.
- Debt Interest Payments – Most in this country would agree that the Federal Debt is just too high, but did you realize that the interest payments on this debt is now over 1 trillion a year? What should we do about it? My guess is we should balance the government budget…. But no one is asking me.
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
**Case Study Disclosure** The case study presented is purely hypothetical and does not represent actual client results. This study is provided for educational purposes only. Similar, or even positive results, cannot be guaranteed. Each client has their own unique set of circumstances so products and strategies may not by suitable for all people. Please consult with a qualified professional before implementing any strategy discussed herein. No portion of this case study is to be interpreted as a testimonial or endorsement of the firms' investment advisory services.
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.
This report was prepared by Hobbs Wealth Management a State registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Neither the information nor any opinion expressed it so be construed as solicitation to buy or sell a security of personalized investment, tax, or legal advice. For more information please visit: https://adviserinfo.sec.gov/ and search for our firm name.
This newsletter is prepared to provide a degree of insight into the analysis used by Hobbs Wealth Management to make investment decisions. It is not a complete description of all factors used by Hobbs Wealth Management to make decisions on behalf of clients. The opinions included are not intended to be taken as fact, but are Hobbs Wealth Management’s interpretation of the impact of external events on investments.
The information herein was obtained from various sources. Hobbs Wealth Management does not guarantee the accuracy or completeness of information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. Hobbs Wealth Management assumes no obligation to update this information, or to advise on further developments relating to it.
This article contains external links directing you to a third-party website. Although we have reviewed the website prior to creating the link, we are not responsible for the content of the sites.
An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.
The mention of specific securities and sectors illustrates the application of our investment approach only and is not to be considered a recommendation. The specific securities identified and described herein do not represent all of the securities purchased or sold for the portfolio, and it should not be assumed that investment in these securities were or will be profitable. There is no assurance that the securities purchased remain in the portfolio or that securities sold have not been repurchased. For a complete list of holdings please contact your portfolio advisor.
Hobbs Wealth Management may discuss and display, charts, graphs, formulas, stock and sector picks which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. This specific information is limited and should not be used on their own to make investment decisions. This information is offered as educational only.