The Surroundup, Videos
THIS TOO SHALL PASS
- by Adil Mohammed, CFP®, CIM®, FCSI®
- August 26, 2022
Well, the first half of 2022 is officially behind us.
It was certainly one for the history books.
To provide some context, here’s what we just experienced:
- First half of 2022 ranks in the worst 3% of all 6 month returns since 1926 for stocks (only 6 months performance numbers that were worse occurred during Great Depression, 1937 crash, WWII, 1970 bear market, dot come bubble and 2008 crash)
- 5-year US government bonds (conservative investments) were down 7.4% through May 31, 2022, the second worst 6 month return ever
- 2022 first half return for a balanced portfolio was in the bottom 2% of rolling returns going back to 1926
- 4th time over the past 100 years that both stocks and bonds were down 2 quarters in a row at the same time
- Worst start to the US stock market since 1970
- The market fell 5% or more in 3 out of the first 6 months – this didn’t happen at all last year and only twice in 2020. There were actually no down 5% months in all of 2017, 2016, 2014 or 2013.
Let’s all pause, take a moment and appreciate what we’ve just experienced. It’s important to acknowledge that again, without fail, you continue to stick to the plan and trust the process, through an extremely challenging market environment. It’s through difficult periods like this that long term wealth is created.
To quote a Canadian portfolio manager “the point of maximum pessimism happens to coincide with the point of maximum financial opportunity”
If you’re interested in knowing how we got here, I recommend checking out the video below:
As we navigate through the second half of the year and beyond, here are three things worth mentioning:
It’s all about expectations
In the short term, markets move based on expectation. A company’s stock can sell off on great news if expectations are too high and they can rally on terrible news if expectations are too low. In the first half of 2022, markets priced in or “expected” the worst – soaring inflation which would be met by multiple interest rate increases, which would cause the consumer to stop spending, which would reduce company earnings, which would lead to the economy slowing down, then layoffs and finally an imminent recession.
Instead, we learned that company earnings were mixed, but better than expected. As a financial blogger put it “not bad is good enough”.
We learned that the labour market is still strong. We learned that inflation is still high but it recently came in lower than expected and could be slowing. We learned that interest rates are still rising but it’s possible they will rise less than what was “priced in” or expected if inflation continues to fall. We learned that a recession, although still a risk, is not immediately upon us.
Eventually the maximum amount of bad news and pessimism is priced into the markets and therefore less bad news can move markets higher.
Where are we now:
- July was the best month for the US market since November 2020
- As of August 9th, 90% of stocks in the Russell 1000 (largest 1000 companies in the US) are up as of June 16th, which at this point, is considered the market bottom
- US market has now made back more than half of its losses
- US market hit a fourth week of gains, longest winning streak since early November 2021
I’m not saying we’re in the clear, there are still a lot of risks out there – inflation is 8.5%, yield curve is still inverted (sign of a recession), Central bank is still raising rates, gas prices are high, war is ongoing etc.
I’m simply saying that investors were likely too pessimistic earlier in the year.
Are investors overly optimistic now? Only time will tell.
Either way, it’s not about good or bad, it’s about better or worse.
The market is not the economy
It’s easy to get lost in the daily market mania of inflation, interest rates, recession, growth, jobs, Covid re-opening, supply chain, war, earnings, China – take your pick.
However, it’s important to remind ourselves that the market is not the economy. Sure, they are related but Main Street doesn’t always reflect what’s happening on Wall Street, and vice versa.
One of the biggest differences is that most of the economic data we receive is backward looking, also known as lagging indicators whereas the market is forward looking.
For example, a company may report record earnings but provide a cautious outlook of the future and the stock may fall. That’s because earnings is a snapshot of the past and the market cares about the future.
The same can be said about inflation data, jobs data, GDP data – these all give us a glimpse into the past.
Think of 2021, when much of the world was still dealing with restrictions and lockdowns yet the stock market was hitting new highs. Clearly the market was looking 6, 9, 12, 18 months ahead at a world beyond Covid.
Fast forward to 2022, when most economies had re-opened and Covid had become less of a concern, yet the market had turned negative already looking ahead at potential inflation risks.
Now, the current debate is whether the US is in a recession or not, a word that many investors fear. It’s hard to make the case that the US was in a recession during the first half of the year. At the same time, a case could be made that a recession is coming.
That said, on average the stock market bottoms 116 days before the economy does. This means the news will get worse, but the market will stop reacting to it.
This is because the economic data is backward looking and the market cares about the future.
Trying to make sense of everything going on is impossible. Our suggestion – leave that to CNBC and zoom out.
This too shall pass
I follow a twitter account called “All the Right Movies” which basically shows clips of old movies or behind the scenes footage. I recently came across a roundtable of a group of notable actors sharing advice that they wish they had given to their younger selves. The group included Jamie Foxx, Robert Di Niro, Tom Hanks, Adam Sandler and a few others. Here is what Tom Hanks had to say:
“I wish I had known, this too shall pass. You feel bad right now, you feel angry, this too shall pass. You feel great, you feel like you know all of the answers, you feel like everyone finally gets you, this too shall pass. Time is your ally and if nothing else just wait it out”
I can’t think of a statement that better resonates with how investors should think about markets. You must keep your emotions in check. You can never get too high or too low.
When the market is soaring and your statement is hitting new highs – this too shall pass.
When you think the world can’t get any uglier and the only direction is down – this too shall pass.
Remember the market typically overshoots in both directions – on the up and the down.
Think of 2021, the market clearly got ahead of itself yet most investors anchored to their highest portfolio value as if the money were in their pocket. Any decline from that point felt like a loss and was met with disappointment. In hindsight, we should have told ourselves “This too shall pass”.
At a same time, the first half of 2022 has been overly pessimistic– again, this too shall pass.
Unless you are selling your entire portfolio in the near term, the daily, weekly or even monthly market moves don’t mean that much. Think about your house, you may not see it but it’s fluctuating in value every day but because you know you’re not selling it anytime soon, you ignore the short-term fluctuations.
The same hold true when it comes to the equity markets, during the good times and the bad, we should continue to remind ourselves “this too shall pass”
John Templeton once said “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
I certainly don’t know where the market is heading in the short term. Is the worst behind us? Will June 16th be considered the bottom or is there more pain to be had?
Either way, this too shall pass.
What I do know is that every bear market is unique, but they all share one thing in common – they end. This small detail is a huge deal, and offers the kind of clarity that can give you back control.
On behalf of Surround Wealth Advisors,
Adil Mohammed, CFP®, CIM®, FCSI®
Wealth Advisor
Assante Financial Management Ltd.
Source:
https://awealthofcommonsense.com/2022/07/the-worst-6-months-ever-for-financial-markets/