Many investors are watching the market right now, trying to make sense of what’s going on and get some perspective. However, that can sometimes be difficult when you’re IN the situation; many times we need a little distance to understand what was really happening at the time.
Of course, in my years as a financial advisor, I know this. But it’s always nice to be reminded. A client recently forwarded to me one of my old newsletters from April 2020. Here’s where we were:
- We were at the beginning of the pandemic and experiencing uncertainty unlike many of us have seen before.
- Global markets took a dive, and the US was one of several countries offering stimulus packages to help businesses and individuals.
- The result was historic volatility. By the end of Q1 2020, the S&P 500 had fallen by 20%.
What happened next
Of course, hindsight is 20/20. With all the stimulus spending, the market made a quick comeback – but we didn’t know that was going to happen until it did. What we did know is, when it came to planning for uncertainty in the market, our clients were as prepared as they could have been. And, had someone pulled out, they would have missed the bounce back.
This is why the income strategy that we utilize for our clients who are in retirement is so important. This is also why it is so important to check the level of risk that you are taking in your portfolio against your risk tolerance.
What’s happening now
Interest Rates & Recession
The Fed is trying to slow down the economy and inflation by raising interest rates. This is not a sign of an economy that is about to crash. Keep in mind: historically we see a recession 12 to 24 months after the Fed begins raising rates.
This is not necessarily a bad thing. Recessions are like forest fires – you need one to come through every so often to clear out the brush and allow for new growth. So the answer to the question that so many are asking is this: yes, we are probably headed towards a recession, but most likely not tomorrow.
Gas prices are high. Without question, this affects the poorest in our population first. As a country on the whole, we now spend a smaller percentage of our income on gas than we have historically.
Rather than travel decreasing, it is increasing. In fact, when the May inflation numbers were reported, there was a 19% increase in the cost of airline travel. This was a major part of why the inflation estimates were off. No one likes paying more at the pump, but the reality is that many Americans are not significantly changing their behavior due to gas prices.
Stock prices were inflated in comparison to their norms. One way that we value stocks is to use what is called the price-to-earnings ratio: Typically, you can take the earnings of a company and multiply them by 16 to 18 to see where the stock should be priced. Many companies – especially technology companies – were trading in the 30-50 range.
I remember last year reviewing the stock of a company that my client worked for, and the earnings came in at 72. This was for an established company that actually had earnings to report. Today, that same company is trading at 25.8 times earnings - it is back in the right neighborhood. Recently, the total market has been much closer to the 16 to 18 range.
Historically, investors have flocked to bonds when stocks were going down. That hasn’t worked this year. The bond market is currently experiencing one of its worst years ever. This doesn’t mean that you shouldn’t own bonds, it just means that it is a challenging year.
Where we’re going
The only certainty about the market is unexpected movements will occur; sometimes they are caused by general economic conditions (think 2008) and sometimes they are caused by specific events (think Covid, war in Ukraine). Even with specific events, all major predictions don’t have a major impact (think Bird Flu, 2016 change in President).
What I do know is that the market will continue to correct itself over time. Now is not the time to panic. Now is the time to stay the course. This too will pass. I’ve been spending several hours each week listening to economists and portfolio managers; not a single one of them said go 100% to cash and sell off while the markets are down.
Remember things tend to overshoot on the way up and on the way down. Did we overshoot when the market recovered from March of 2020? I would say yes. Are we currently overshooting on the way down? Time will tell.