Short Term Pain, Long Term Gain
Investing in stocks has historically been a wonderful way to compound wealth. However, there is a ‘fee’ for accumulating inflation-beating returns over the long term. More on this ‘fee’ later. Bear markets (characterized by a stock market falling in excess of 20%) is something we must endure as long-term investors. This is the trade-off we make to participate in the profits of U.S. companies. Bear markets are never fun regardless of how many you have experienced. The one thing all bear markets have in common: there is always some aspect to them that differentiates them from past bear markets, which leads you to fear that perhaps this time is different…maybe this is the time markets don’t recover.
The brutal bear market ignited by the ‘Tech Bubble’ popping in 2000, persisted thanks to the fraud induced bankruptcies of WorldCom and Enron, and exacerbated by the 9/11 terrorist attacks, killing nearly 3,000 Americans. There was no way the stock market would ever recover, in fact, the stock market closed for a week. In 2008, Wall Street banks peddled fraudulent mortgages to unsuspecting consumers (many of whom had no job or income). These subprime mortgages eroded causing U.S. banks to fail, forcing them into the rescuing arms of the government and U.S. taxpayers. Most of the major U.S. banks were on the brink of failing…how would markets ever recover from this? In early 2020 our economy was grounded to a standstill due to a relatively unknown deadly virus, which forced us to be locked in our homes to prevent the spread of Covid-19. How long would we be in lockdown? How many Americans would be killed? We’ve never been through anything like this before, so how will markets ever recover? But markets are resilient and have always rebounded. I don’t see anything in today’s bear market to make me think this time will be different. We can’t time the markets, nobody can. I can’t predict when the market will recover, but fortunately history is on our side. As we’ve done in past bear markets, we are actively taking advantage of lower prices, knowing that we will eventually be rewarded.
“Reducing inflation is likely to require a sustained period of below-trend growth…there will very likely be some softening of labor market conditions…While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain…These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
The stock market (S&P 500) is now down more than 20% this year. The previous 3 years saw the market rise 78.34%. The previous 5 years, the S&P 500 climbed 95.44% or 19% per year:
2017: 21.7%
2018: -4.6%
2019: 31.22%
2020: 18.37%
2021: 28.75%
These returns are significantly higher than historical averages. We are simply giving back some of our recent gains, this is normal.
Morgan Housel, author of the must-read ‘The Psychology of Money’ explains ‘the fee’ for participating in the long term gains of the stock market:
“Most things are harder in practice than they are in theory…’hold stocks for the long run’…its good advice. But do you know how hard it is to maintain a long-term outlook when stocks are collapsing? Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret—all of which are easy to overlook until you’re dealing with them in real time…The world is never that nice. There’s a price tag, a bill that must be paid. In this case, it’s a never-ending taunt from the market, which gives big returns takes them away just as fast. Including dividends, the Dow Jones Industrial Average returned about 11% per year from 1950 to 2019, which is great. But the price of success during this period was dreadfully high…you can pay this price, accepting volatility and upheaval. Or you can find an asset with less uncertainty and a lower payoff…”
Now for some good news. Bear markets are temporary. In fact, according to Schwab, the average bear market lasts about 446 days, and stocks fall 38.4%. Bull markets last on average 2,069 days and returns have been 209.2% on average:
As painful as it is, the Federal Reserve is doing its job to fight inflation. I know this sounds counterintuitive; the Fed is fighting inflation by raising the price of everything. But the cure for high prices is high prices. Eventually prices get to a point where buyers stop spending. Which brings me to a point that I believe gets lost in all of this: prices are high because there is consumer demand. Airline tickets are expensive not because of supply chain issues, but because the airlines are getting us to pay those high prices. Hotels would not charge $1,000 per night if they couldn’t get it. The US consumer is better off than the stock market (and the media) would have you believe. The average credit rating for Americans today is 716,-- the highest on record. And they will likely continue to spend as long as they’re employed. There are still 11 million job openings, and the number of Americans applying for unemployment aid has dropped for 5 straight weeks. All of these numbers are likely to deteriorate because the Federal Reserve needs to cool inflation. If we see a recession, I don’t expect anything like 2000 or 2008, based on the strength of the US consumer and jobs market.
All bear markets in hindsight have been buying opportunities, and this one is no different, in my opinion. We feel more comfortable buying stocks when there is an abundance of fear and uncertainty. It’s precisely this fear and uncertainty that is providing us with lower (better) prices to accumulate great companies. And because bear markets are temporary, the buying opportunity won’t last.
We are here for you. Let’s discuss further.
Thank you!
-randy
The opinions expressed in this newsletter are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Hamilton Wealth, LLC is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Hamilton Wealth, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Hamilton Wealth, LLC unless a client service agreement is in place.