I took a few days off last week for a little getaway. Flying back on Sunday, I was able to read the Wall Street Journal Weekend edition. A cover story in Section C was a review of the trade war between the U.S. and China that kicked off in 2018. The article was interesting: it brought to mind the bear market of 2018 caused by this trade war.
I am sure you will recall the 4th quarter of 2018 when the S&P 500 fell 20%. You do remember this bear market, don’t you? Fast forward to the pandemic of 2020. The S&P 500 fell 34% in 5 weeks. I am certain you recall this decline.
For those who may have read my commentaries in the past, please don’t worry – I am not going to belabor you with returns and dates, so please keep reading.
If you are not watching the financial or any other news, good for you! For those who may not know, let me bring you up to date. Last Friday, the S&P 500 dipped into bear market territory with a decline of 20% from a recent high. The market closed out Friday above the supposed 20% magical number. Is this a bear market or not? That is not the point of this letter. For the sake of argument, let’s deem this a bear market and let me move on.
As I opened above, we have had two bear markets. This will be the third since quarter 4 of 2018. By my count, the stock market has done this about one year in five since the end of WWII. This fact should sound familiar to our clients as I tell them all: If you cannot ride out a bear market, you should not be an equity investor.
Their causes vary, as they always do, but please understand bear markets are an ordinary part of investing. The depth and length of the bear market always vary, but one thing they all have in common is how bear markets are portrayed by the financial press.
As intelligent and informed investors, you already know the primary function of financial journalism seems to be terrifying us out of ever achieving our financial goals. They shriek about the market’s volatility, and they remind us 24/7 of any declines. They provide no perspective, only leading you to believe this is “unprecedented” with “no bottom in sight”. I truly feel for the uninformed investor who falls victim to this constant barrage.
Regarding the current decline, I think it’s fair to say that this episode is a response to two issues: inflation and the extent to which the economy might be driven into recession by the Federal Reserve’s somewhat belated efforts to root that inflation out (Russia’s war on Ukraine, supply chain issues and the like are surely contributing to the angst, but recession vs. inflation is the main event, in my opinion).
I look at it this way:
From March 2009 (when the equity market bottomed at the end of the Global Financial Crisis) through the end of 2021, the S&P 500 produced an average annual compound return of 17.5%. Indeed, over those last three calendar years (2019 – 2021), despite a hundred-year global health crisis that carried off millions of people worldwide, the Index compounded at 24% per year. This was one of the greatest runs of all time.
But, it is evident to me that some part of that extraordinary accretion in equity values was due to excessive monetary stimulation by the Fed. And to that extent, we are having to give some of that gain back, as the Fed moves to bring the resultant inflation under control. We should, I believe, want them to do this, even if it means the economy slows. In the long run, the cure (possible recession) is not more painful than the disease (inflation).
For long-term investors, capitulation to a bear market by fleeing equities has often proven to be a tragedy from which their retirement plans may never recover. Our investment policy is founded on acceptance of the idea that the only way to be reasonably assured of capturing equities’ premium returns is by riding out their occasional and temporary declines.
Please note, my mission continues: not to insulate you from short to intermediate-term volatility, but to minimize your long-term regret – the regret that has always followed a fear-driven exit when equities resume their long-term advance. As they always have.
I continue to counsel staying the course. I am always here to talk this through with you. Thank you for being our clients. It is a privilege to serve you.