Market corrections are tough to experience, but it is important to remember two things. They’re not permanent, and after night comes the dawn. Market booms are followed by busts, which are in turn followed by booms again. Calling the turning points is extremely difficult and attempting to do so in the short term can often lead to even worse results.
Last Friday we saw a higher-than-expected top-line U.S. Consumer Price Index (CPI) print, which caused markets to sell off and the Fed to ignore its promise of raising rates 0.5% (they raised 0.75%). The sell-off brought the S&P 500 Index into bear-market territory, defined as a drop of 20% or more. Less widely reported, we also saw some broader economic data disappoint, making the inflation picture more nuanced than market movements suggest.
While top-line CPI shocked markets with an increase (8.6% vs 8.3% in April), core CPI trended down as expected (6% vs 6.2%). The difference is food and energy, which are elevated due to the Russia/Ukraine war and as such cannot be influenced easily by the Fed. Making matters worse, retail sales, housing starts, and other broader economic data now point to a clear slowdown, as does Target’s announcement of cutting prices to clear inventory. This means that at a time of already slowing demand, the Fed is telling us they will aggressively slow demand further by raising rates.
At the start of the year, the market was concerned about the high inflation but that is now replaced by worries about growth. In fact, we may already be there as recent data has some analysts calling for a December end to the Fed hiking schedule for fear of a recession. Equities are starting to price in that reality and have traded to and in some cases below long-term valuations.
By ignoring its recent guidance, the Fed has made clear that they will react to incoming data and sentiment pressure. As a result, it is possible that they will pause sooner rather than later and are simply trying to front-load increases to recapture their inflation-fighting credibility.
If your time horizon is long-term, know that your portfolio will recover. We own little to zero speculative positions and portfolios are widely diversified. By and large, we have avoided unprofitable tech and “pie in the sky” valuation companies, which means that the companies we do own will manage through any economic slowdown.
Equities average returns of ~9% a year, so if you don’t need cash now, do not panic. Selling today will look great for a bit if markets drop further, but will feel less pleasant after the inevitable and hard-to-time turnaround in sentiment.
In fact, for those who can, now is the time to incrementally add and accumulate at lower entry points. Equities make sense for the long-term and in every bout of weakness, there’s opportunity. Below are a few key points to keep in mind:
Short-term stock volatility is just that – short-term
Over any rolling 10-year period since 1970, equities have averaged 9% a year, the worst return was -3%, and only 3% of 10yr periods were negative
Timing only matters short-term – even the unlucky are wealthy
Over 50 years, regularly buying at the peak of each year, vs the start of each year, results in almost the same returns.
Unlucky investing beats conservative – compounding is the 8th wonder of the world
50 years of safe bond investment would have resulted in only one-quarter of the money you would have accumulated by investing in equities.
Corrections are more common than not
The average correction in any given year is -14%, but only 2 of 16 years with -15% drops intra-year stayed that negative by year-end.
Please reach out to us to review the impact on your portfolio, and ways to decrease volatility or add exposure depending on the right move given your financial situation and objectives.
DISCLAIMERS & DEFINITIONS
This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results.
Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The S&P 500 Index, or Standard & Poor's 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S.
The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.
Rebalancing/Reallocating can entail transaction costs and tax consequences that should be considered when determining a rebalancing/reallocation strategy.
Asset Allocation does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.