Summer is in full swing, and it is another hot one! We hope your summer has been spent with the ones that matter most and not in front of the TV watching the news. Is the world coming to an end? No, but one may think so, based off recent headlines in the media. Some clients have said, “It just feels different this time around.” Well, in some ways it is, and in other ways the recent volatility and course-correcting is a normal part of being a successful long-term investor.
Through June 30th, it had been the worst start to a year for bonds and 3rd worst start for stocks, dating back to 1926*. When we look at fixed income or bond investments, we view them as more conservative and relatively safe investments. We have never seen this kind of volatility in bonds, especially in just a 6-month period. There have only been two worse starts to the year in stocks since 1926; 1932 (-43.3%) and 1962 (-22.3%). On the bond side, you will see from the chart below that in every instance, the following 6 months had a positive return. The two instances stocks started the year worse than 2022, they also had positive returns over the next 6 months. There is no way to sugarcoat it, it has been a tough year as an investor. But, we want to consider returns on a go-forward basis. The reality is the pain we just experienced is where we are today, now the question is where are we going?
Our investment policy has not changed: we are long-term, goal focused, plan-driven equity investors. We strive to own diversified portfolios of superior companies; these companies have demonstrated the ability to increase earnings (and in most cases, dividends) over time, supporting increases in their value. We act continuously on our financial and investment plan; we do not react to current events, no matter how distressing they may be. There will always be a reason to sell, that will never go away. Looking back at the past 40 years, here is a long-term view of stock market volatility:
Had you invested $10,000 in 1980, your money would have grown to $1,157,006 in May, 2022. This is why people invest in the stock market. But, look at the bumpiness along the way. The green dots represent challenges on the path to those returns. We always climb the wall of worry with the markets, but the reality is, there are always going to be issues with the FED, or geopolitical concerns, or crises along the way. Sometimes, we get so focused on the here and now, we forget about the long-term picture.
“Be fearful when others are greedy, and be greedy when others are fearful” – Warren Buffet. Historically, when you have massive amounts of pessimism, investors should be bullish. The graph below is a ranking system set up by the University of Michigan. They poll consumers, to evaluate sentiment. Meaning, are they positive or negative about the current state of the economy and their finances? When there is high pessimism, the score will be low or indicate a trough. Conversely, when optimism is high, it will indicate a peak. Currently, sentiment is very low and hasn’t been this low since May, 1980.
The image above shows average subsequent 12-month S&P 500 returns if you were to invest in these different highlighted periods (blue dots). There has been 8 sentiment peaks and 8 sentiment troughs. The average 12-month return at the sentiment peaks was just +4.1% and +24.9% from the sentiment troughs.
This is a good reminder that when you are bullish, feeling positive or optimistic about the market, this is historically not a good time to invest. Feeling this way should not shape your investment decision making. At each point of low consumer sentiment, the next 12 months have had a noticeable increase in returns. Past performance is not indicative of future results, which is why we want to remain disciplined and diversified.
We’ve said this before, volatility creates opportunity. Investors still in accumulation mode should welcome this volatility because you are able to purchase companies at discounted prices. For our clients that are retired, we have to focus on your future spending needs and make sure your current allocation supports these needs.
We cautioned clients after coming off 3 strong years that volatility was likely to return in 2022. This resonated with clients at the time (but markets were hitting all-time highs). Now that we are in the eye of the storm, it is a lot harder to stomach the large swings in your portfolio values and remember that this is a normal part of being a good, long-term investor.
If you would like to discuss your long-term financial plan in greater detail or would value a review of your current investments, please contact our office to schedule time with one of our Wealth Advisors. If you are not currently a client and value a second opinion, we are here to help.
Disclosures: The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Past performance does not guarantee future results. The information provided is for educational and illustrative purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. Vance Wealth, Inc. (“Vance Wealth”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Vance Wealth and its representatives are properly licensed or exempt from licensure. The S&P 500 is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in an index.
Sources: 1. BlackRock – Student of the Market, July 2022