As we plod through our third bear market in four years, there’s a certain weariness that’s set in. Perhaps not just due to multiple bouts of market volatility, but rather the bear markets on top of a culmination of many other things: a global pandemic, business shutdowns, the supply chain mess, record gas prices, homeschooling kids, isolation from loved ones, the conflict in Ukraine, and the list goes on.
Indeed, we are all so very fatigued… The legendary coach, Vince Lombardi, is to have said, “You've got to keep yourself in prime physical condition because fatigue makes cowards of us all.” There is so much truth in this statement.
Sitting down to write you this letter brings me back to March 9th, 2009. In hindsight, that day was the very bottom of the worst financial collapse in modern times, though how could anyone have known it? If you remember the great financial meltdown, the panic on Wall Street…things were bad.
I distinctly remember the bullpen, the room where many of the advisors sit at Merrill Lynch in Boston, everyone on their phones, a look of exasperation on the faces of the “veteran” advisors. Maybe I should put the word “advisors” in quotes, too. I witnessed these veteran advisors talking about how they were putting their clients’ money into cash “for the time being,” their legitimate argument being that it was a time of adversity. They weren’t wrong: it was a time of great adversity.
Yet since March of 2009, the S&P 500, including dividends reinvested, has compounded over 17% annually through the end of 2021. Furthermore, the index is up nearly seven times from its low, which is one of the greatest runs in the entire history of American equities.
But if you go back in time to March 9th, 2009, there wasn't any evidence that this would happen. You couldn’t hear it, see it, read it in the media, newspapers, television shows, or get any indication of it from people inside the financial services business or outside it. All I can remember was that the financial media was reporting, essentially, Armageddon. And I also don’t remember any sirens going off or any news alert saying this was going to be the best time in perhaps any of our lifetimes to be invested in the markets (which it turned out to be.)
Today, once again, we find ourselves in a time of adversity.
As it stands right now on a year-to-date basis from the beginning of 2022, the S&P has declined more than 20% since its all-time high in early January. What is particularly interesting is how much volatility has increased as the market continues its downward trend. For example, in the middle of June, the market had a streak of five out of seven trading days in which 90% of the S&P 500 stocks traded lower. The amount of negative sentiment that needs to be present for over 90% of the S&P 500 to close lower – that’s pretty substantial.
Here's something I know from experience. Bad news causes people to make bad decisions with their money. Now consider how fatigued we all are, and bad news causes folks to make really bad decisions with their money.
I’ll say something now that is very simple: if there is one way to eliminate any chance for investment success in your lifetime, it’s historically been to sell your stock portfolio during a bear market.
But to sell when we’re seeing such incredibly low investor sentiment, so much so to drive 90% of the S&P stocks lower over a few trading days in June must come with the possibility of us making the biggest investment mistake of our lives.
I want to acknowledge the volume and height of negativity that we're seeing and try to make sense of what’s happening today in the markets. In my letter to you earlier this year, we talked about this, though it bears repeating. When inflation soared late last year, it became evident that the advance of stocks over the past twelve or so years (but particularly since the pandemic) had been fueled, at least to some extent, by an excess of monetary stimulus. In other words, the Federal Reserve created liquidity in the markets to offset some of the challenges we have experienced in recent years and in doing so put into motion too much money into the system. Or, at a minimum, has left too much money sloshing around in the system for too long. In other words, it seems that the Fed has moved perhaps a little slowly in reining in this excess money in the system.
How is the Fed counteracting this excess in the money supply? Well, it is doing so by raising interest rates. Additionally, the conflict in Russia and Ukraine has introduced among other things, further issues which have exacerbated inflation. The fear is that as the Fed moves to raise interest rates that it will in effect, raise them too high, thereby thrusting the economy into a recession.
Whether that happens or not is beside the point. Our discussions with you have always been and continue to be to this day: If the Fed needs to raise interest rates to bring our economy to a better place, so be it. And if that creates a temporary economic slowdown over a few calendar quarters to do what it takes to destroy inflation, so be it. We believe that inflation is a cancer, and that it must be destroyed.
So, when it comes to our investment philosophy, nothing changes, regardless of what’s going on outside. As we state in all our letters and blogs and communications with you, we are long-term goal-focused investors. We own portfolios of great companies that are getting better. By the way, these companies have demonstrated an incredible ability to raise their earnings over time, and many of the companies in our portfolios raise their dividend payments substantially over time, creating a spectacular foundation for your portfolio's long-term increase in value.
We act continuously on our financial and investment plan. Nothing changes. We keep evaluating companies using our proven methodology. Nothing changes.
What we do NOT do is react to the news, to current events, to higher-than-normal inflation numbers, a conflict in Europe, a global crisis. No matter how distressing these current events may be, we do not react to them inside of our portfolios.
We are all, most understandably so, fatigued. When we are at our highest levels of exhaustion, as many of us are today, that is when the impulse to capitulate becomes so much stronger. That’s when the illusion of finding safety in cash becomes strongest. This is also when that impulse needs to be most resisted.
It is at times like this when I hear my calling. This is when I am reminded why I must do the work I do. My existence in the financial world, Beck Bode’s mission, is to connect you with the information to make the best decisions for you and your finances.
I would argue that the time when we are at our most effective in our role as advisors is when the markets are at their most challenging. (The other extreme of the spectrum is also a place where we can be of service to our clients, because when people get caught up in euphoric markets, in fads and bubbles – in BitCoin, for example – that’s another opportunity for us to do our work.) Because that is when folks are at the greatest risk of making a decision that will severely impact their future.
My job is to be there for you when circumstances outside of your control are testing your emotional state. Because you know what? “Volatility fatigue” is not an investment policy. Moving to cash “for the time being” is not an investment policy, either. Volatility is a phenomenon; a kind of mood swing up and down that is just a distraction from a long-term upward trendline. The only way you disrupt that long-term trendline is to give in to that fatigue. Vince Lombardi’s quote is hardly just about physical fitness and football. We keep ourselves in “prime condition” by practicing discipline, not getting distracted from the end goal, staying the course, and by not letting fear get in the way of the pursuit of our dreams.
My job, our job, is to help you resist the impulse to move to cash, so that you can stay and act continuously on your well-thought-out financial plan, which is the best path to reaching your most cherished financial goals and objectives.
This too shall pass. We are all here for you. I am here to talk with you at any time. Thank you for being my clients. It is a privilege to have the responsibility to help you achieve your financial goals and dreams.
“Sweet are the uses of adversity,
Which like the toad, ugly and venomous,
Wears yet a precious jewel in his head”
As You Like It
- William Shakespeare
Benjamin Beck, CFP®
Managing Partner | Chief Investment Officer