02/2024 - Volatility
Full written article below.
Fortune Magazine
From time to time I’m honored with different recognitions. Recently, I’ve been included with a group of advisors, which was then listed in Fortune Magazine, here’s the publication if interested – Link – thank you to all my clients for your continued support and trust!
2022 and 2023 were like mirror years. 2022 went down about 25% and 2023 went up about 25%, we almost finished 2023 where we started in 2022. What am I getting at? This volatility that has always been with us and I’m guessing will always be with us.
In the chart below, you’ll see that since 1980, every single year had an episode of negative returns, however, out of the 44 years shown, only 11 years finished negative. Great example of volatile markets. But what was your return over this period of time?
When you look at investment data from 1980 - 2023, you’ll see some rather eye-popping statics. Source
- Annualized Returns with dividends reinvested and tax-free = 11.66%
- Annualized Dividend Growth rate = approx. 5.88%
- Annualized Inflation Rate = 3.17%
- Growth of 100k from 1980 – 2023 would be about $11.4mil
And don’t think I’m cherry-picking data points here, because if I look at data from 1950 – 2023, it’s a very similar story. Source
- Annualized Returns with dividends reinvested and tax-free = 11.32%
- Annualized Dividend Growth rate = 5.72%
- Annualized Inflation Rate = 3.54%
- Growth of 100k from 1950 – 2023 would be about $251mil
Final Data point, just to pile it on, going from 1926 – 2023. Source
- Annualized Returns with dividends reinvested and tax-free = 10.2%
- Annualized Dividend Growth rate = 4.96%%
- Annualized Inflation Rate = 2.94%
- Growth of 100k from 1926 – 2023 would be about $1.2bil (yes, that’s a billion)
Now, when we see these tremendous historical figures like this, we all think, let’s just jump on board for these 10-11% investment returns. Well, not so fast, for two primary reasons.
1. Between years 1926 – 2023 there were only 7 years out of 97 that the annual return figure was within 2% of the long-term average. See image below. Another great example of volatile markets. Source
Most clients don’t ride out the frequent, but historically temporary market declines, helping clients stay correctly invested is one of the areas I provide value.
2. Assuming do you stay invested over this period, keep in mind that most don’t, you then need to answer the question of how do I actually keep the majority of what I made? Helping to answer this question is another area where I provide value to clients.
If you’ve gotten this far in my newsletter, you’re either likely half-asleep or want me to just get to the point already, of why am I devoting this entire newsletter to volatility in the markets? Reason being is that this volatility is what helps create the efficient market that has historically rewarded its participants.
To pile it on, this is just one of the many reasons why I encourage us all to continue to have faith in the global economy. Unless the world ends, developing your financial plan, then investing according to that plan, and staying invested is likely the best outcome to follow.
As always, should you have any questions, don’t hesitate to reach 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.
- 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 41% (dates from 10/13/22 to 2/6/2024 source: Yahoo Finance)
- 6.1 Trillion in Money Markets – At it’s highest level every reported, there’s 6.1T 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 2.24%. 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 1.4 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
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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.
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