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Serenity in Times of Volatility

Serenity in Times of Volatility

| October 01, 2022

You do you
Investors are said to have a love-hate relationship with investing. (Last year we “loved” our tech stocks, this year we “hate” them.) Fueling the emotion is the media commentary, both traditional and social, which tends to amp up the intensity of what’s happening on any given day in the markets.
To be sure, both stocks and bonds are providing their share of excitement this year. But if you’re working with an investment professional, most of that emotion is stress you don’t need. The majority of financial commentators on television, Twitter or your favorite podcast are talking about their trading, i.e., the moves they’re making in and out of stocks. They’re either crushing it or getting crushed, all day every day.

But, that’s not you. You’re investing to fund long-term objectives—whether it’s a college education, retirement, or a seat on the next rocket to outer space—with the help of a professional who’s trained to anticipate periods like these. Relax, they’ve got you. A chronic overreactor named Frank Costanza famously invoked the chant “Serenity now!” when life got stressful. Sadly, Frank failed to practice what he preached. If only he could have seen the charts on the following pages.

It is what it is
Let’s not sugarcoat it: As of mid-June, with the S&P 500 down more than 20% from its peak in January, stocks are struggling for the third time in four years. But take a step back and look at the recovery from those previous drawdowns (-35% in 2020 and -19% in 2018). As suggested by their V shape, 2018 and 2020 bounced back quickly. And, what’s the first thing you notice? The market fell from a higher point in each case.

Zoom out
The market rises a lot, and falls a little. If your goal is the first part, then you need to expect the second part. One doesn’t happen without the other.

Stocks gain in most (not all) years
History has shown that there’s no alternative to equities in providing better potential for capital growth over the long term. Every calendar year you’re invested won’t finish positive, but most have. Over time, the market has overcome temporary setbacks of all kinds and proceeded to yield investment returns sufficient to fund the dreams of generations of investors.

What’s the deal with this year?
There have been periods (2021, anyone?) when it’s looked easy. But investing involves risk—as this year is determined to remind us. It’s not just that there have been more negative days than positive, the down days have been deep.

Keep it together now
The market is reacting to uncertainty. Let’s power through a brief list of what’s worrying investors:
» Inflation at its highest since 1981, including $5-plus gas nationwide.
» Interest rates climbing much higher as the Federal Reserve becomes increasingly aggressive about fighting inflation.
» Diminished prospects for borrowers, both commercial and consumer (especially including home buyers coping with 20% higher prices and 6% mortgage rates).
» The possibility that the desired slowdown in growth—the purpose of the Fed raising rates—will inadvertently result in a recession, leading to job loss and shrinking consumer demand for products and services, affecting company earnings.
Add to these the carryover of prior years’ concerns about Covid, China, the Russian aggression toward Ukraine and supply chain disruptions.

This doesn’t help. At all.
Oh and even government bonds—whose role in a portfolio has traditionally been to stabilize—have been no help this year. Treasuries in 2022 have experienced their deepest drawdown to date.

What will it take?
While some of what’s concerning has to do with our current state, the stock market is mostly nervous about what’s ahead, the future. Commentators anticipating recession, for example, are focused on something that could be several months, even a year away. At this point, it’s a waiting (and worrying) game.
The National Bureau of Economic Research (NBER) is responsible for declaring recessions. While many believe that two consecutive quarters of negative Gross Domestic Product (GDP) change constitutes a recession, there are other ways to get there.

The R word
Is recession inevitable? As the market continues to struggle, it’s seeming likelier. Then again, some believe our post-pandemic economy is strong enough to avoid or delay it. Expect to hear a lot about recession (and feel the “recessionary effects,” too). What’s that saying? Ah, yes: Serenity now!

What market-timers miss
If you’re a long-term investor, bull/bear market labels may not matter so much. At the completion of your investment plan, the value of what you’ve accumulated will be the result of your continuous
participation over time.
Just as the market rarely climbs straight up, bear markets rarely fall straight down. Selloffs can take place during bull markets and rebounds have been common in bear markets. Your final value will reflect gains made during both bull and bear markets. Sit out a bear market and you could miss most of the best days in the market.

Who saw that coming?
For example, investors like to celebrate early. We saw that as recently as two years ago when the market rebounded from its collapse over the economy shutting down to fight Covid. Stocks reversed direction on March 24. That was months before a vaccine was shown to be effective and even a few days ahead of Congress’ adoption of the economic stimulus package.
Unfortunately, there were some investors who’d left the market when it was off its highs and mis-calculated when to return. Missing just five days in the market in 2020 could have meant the difference between an 18% gain or an equal-size loss.

Stay where you are, please
Whatever you do, don’t try to time this market.
To time the market is to assume that you’re going to get two decisions correct: when to exit and when to return. More likely, you could get both moves wrong, and your portfolio will be the worse for wear. What happened in 2020 is typical over longer terms, too. If you had missed just 10 days over the most recent 20-year period, you would have reduced your return by more than half ($61,685 vs. $28,260). That’s a heavy toll to pay.

It’s a mood…
The direction of future market moves is impossible for mere mortals to predict correctly consistently. Investors can have a bad reaction to good news and a good reaction to bad news.
Example: Consumers are sour on investing to a historic degree—but some prognosticators take that as a contrarian indicator that could be good for markets!

...but maybe not for long
Check out what such low levels of sentiment have historically meant. Previously, when investors largely have lost that bullish feeling, stocks have surprised on the upside. Sometimes stocks’ unpredictability can work in investors’ favor.

This, too, shall pass
In three out of four bear markets since 1950, according to Barron’s, the S&P 500 has been higher one year later. The chart below shows you the distribution of what’s happened after the market has been down more than 15% in five months.

Vote for up
The second half of the year is sure to bring its own twists and turns. For one, there’s the lead-up to the midterm elections and their aftermath. In general, the second year of a presidential term has been the worst year for the stock market, but note its strong finish.

Isn’t it over yet?

We wish we could say that the worst is behind us. Who knows if it is? We hope so. As you can see below, the average bear market is 14 months long, with a lot of variability.

Serenity within reach
You can’t help but react when the market news is negative, and when you see those who used to be enthusiastic about investing now down in the dumps. But over-reacting is not a strategy. To over-react is to undermine well-considered plans.

The financial news commentators you’re listening to don’t know your agenda (and for that matter, you don’t know theirs). If you’re working with an investment professional, you’ve taken the most important step in moderating the risk of investing. Professionals rely on their specialized knowledge and risk management skills—including investments that lay people may not be aware of—to navigate the volatility that might otherwise jeopardize your tailormade plans and expectations.

Serenity now is a worthwhile goal, we’re here to help you achieve it.


Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice.

References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

Past performance is no guarantee of future results.

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