"Economic Hurricane" - June Newsletter
Firm Update: I continue to work towards updating the branding to Hobbs Wealth. Updated timeline is about 4-6 weeks from now. As I’ve mentioned before, this is simply a name change from Cedar Wealth Partners (which I was a founding partner). I’ll still be using the same processes used with Cedar Wealth Partners and there is nothing clients will need to do.
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Index Update (As of 05/31/2022 from Yahoo Finance)
S&P 500 (Large Cap): -13.5% YTD | +14.48% 10 Year Return
Russell 2000 (Mid, Small Cap): -16.97% YTD | +11.13% 10 Year Return
Global Market – ex US: -11.56% YTD | +6.96% 10 Year Return
“Economic Hurricane”: Jamie Dimon, the CEO of JP Morgan Chase certainly made some waves as he recently cited concern for an recession CNBC.com. Only time will tell if he’s right or wrong, however, I certainly don’t believe in trying to time the market. I’ve learned that from Warren Buffett, Ben Bernanke, and Peter Lynch.
The past few weeks have been noisy, one of the largest data points is on May 20, 2022, the S&P 500 dropped to 20% off its peak, set earlier in the year. Since that low, the market has rebounded about 5%.
When looking at history, there are a few other times a similar market decline has occurred without a Bear Market, would it surprise to know that historically the average return 12 months later is +22%? (image above) Investing.com
Who knows what the future will hold … “What’s going to happen next? Will we go into a recession?” are by far the most common questions I continue to receive over the past couple months.
In this month’s Market Update, I’m going to share Market Truths, Market Beliefs, and wrap up by looking at historical data to use as a guide.
Market Truths
The Stock Market cannot be consistently known or timed
The Economy (as you define it) cannot be consistently known or timed
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
The average intra-year market decline is about 14% and the market drops 15% or more every 3 years. J.P. Morgan | American Funds
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
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
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
With the above stated Market Truths and Beliefs, I emphasize investing in long-term, mainstream equities and as part of this, we must embrace the implied volatility. Equity positions have seen historically consistent outcomes. When I say “consistent outcomes” I’m referring to five to ten years plus outcomes. Additionally, I desire to stay away from trendy trades, like the two listed below.
Gold – in the last three months gold is down 5% while the CPI is up just under 2% (Source: Kwanti.com (Image below)). To me, gold seems to store value just because we call it valuable. Beyond looking pretty, it has a limited industrial purpose. To this date, I’ve never used gold in portfolios.
Kwanti.com
Crypto – to be candid, I’ve never really understood the Crypto-currency space, call me if you want to hear why, it’s a very long list. Regardless, crypto currencies are falling from the sky and what’s more, so called “stable coins” which are designed for safety, are being found to be just as risky. There’s one that was trading at just 23 cents on the dollar. Why? Because this coin wasn’t backed by the dollar, it was backed by another crypto coin! NY Times
Historical Data
2018 – Not many remember why the market dropped close to 20% from October to December in 2018. The causes were linked to a potential monetary change and a trade conflict between the US and China. Since that low at the end of December to the end of May 2022, the S&P 500 is up close to 81%. Which of course includes the Covid recession and our current sell-off. CNBC.com
1974-1981 – was a long season of historically high inflation, the S&P 500 had meager returns during this time period. However, when you see inflation slowing in 1982 the S&P 500 begins to take off with stellar returns. US Inflation. Back in 1982, the S&P was valued at 117.3, as of last month, it’s valued at over 4,000 S&P 500 data
Today we have no way of knowing if the market will continue going down, or if inflation is set to ease, or what the future will hold, but an encouragement is that the market’s been here before and the real risk I see isn’t preventing the next 20% decline, it’s being out the next 100% advance.
With all this stated, this is precisely why we need to focus on long-term financial planning. Starting first with identifying what you’re seeking to accomplish, then align your wealth around those priorities and utilizing historically efficient investments, like equities, to help fund your long-term goals.
If you’re a client and you aren’t fully confident in your current financial plan or investment strategy, please contact me immediately. If you’re not a client and you want to work towards developing a plan you can have confidence and conviction in, do yourself a favor and schedule an intro call with me.
Additional Data: Each month I get asked by clients what additional resources I’d encourage reading. This month I have four. Please hear me in stating I’m not trying to predict anything whatsoever, just some data I’m watching.
Inflation – BLS.gov – looking for inflation to slow and cool-down
Money Supply (M2) - Scott Grannis Blog
PE Ratios - JP Morgan
Profit Margins - Yardeni Research
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.
-Dave
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David Hobbs, CFP®, CLTC | Wealth Advisor | Founding Partner
Offices in Indianapolis & Terre Haute
Office: 317-559-2940
Schedule a MEETING
Email: D.Hobbs@CedarWealthPartners.com
www.CedarWealthPartners.com
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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