Market Update: Fact and Opinion

In my seven years with Seven Springs Wealth Group, the market has experienced five significant corrections: 2015, 2018 (twice), 2020, and now in 2022. We wrote a thought piece in the midst of each correction. I will share our OPINION on where we think we may go from here followed more importantly by the FACT of what has transpired over the past four corrections and three key takeaways of investing during corrections. 

 OPINION: 

“Don’t fight the Fed” is arguably the single greatest investment slogan since the Global Financial Crisis of 2008. We wrote about the “Fed Put” in articles over those years, meaning any time there is market stress the Fed will come to the rescue. Low inflation made this feasible for the Fed until now. The Fed has a dual mandate: maximum employment and price stability. The Fed has maximum employment in-the-bag but inflation is out of control, which is a complete reversal from two years ago during the Covid-19 pandemic. Now the Fed brings their full attention to controlling inflation through tightening of monetary policy. Investors fear the days of the Fed having their back, the “Fed Put,” could be over. Out of all the current news, I BELIEVE the fear of the “Fed Put” being removed due to persistent inflation is the biggest driver of the recent market drawdowns.

Based on that, I see two potential scenarios:

·     Inflation peaks then moderates > the Fed tightens less than feared > rates moderate > the economy returns to low consistent growth of pre-pandemic era > asset prices stabilize/recover

OR

·     Inflation stays high > the Fed tightens aggressively > rates rise to pre-Global Financial Crisis levels > the economy is forced into recession > asset prices go through longer period of drawdown

My OPINION is sometime this year inflation moderates as supply chains begin improving while simultaneously the pent up demand and fiscal stimulus of the past two years roll off. That would lead to the former scenario of moderating inflation, less Fed tightening (they also don’t want a recession that leads to unemployment), and asset prices stabilizing and recovering. Bottom line: it’s taking longer for inflation to rescind than the Fed predicted or desired, but it will eventually moderate. And like all components of the economy, the market punishes uncertainty and rewards stability.

FACT:

It's never a bad time to be a long term investor. For most of 2021, the conversation in our office was where to find attractive risk-adjusted returns. Now rates are higher and stock prices are lower against the backdrop of a relatively healthy economy and strong profits. This leads to more attractive prospective returns. Of course, things can still go from bad to worse. However, like the four corrections before, we believe now is an attractive time to invest capital for prospective long term returns. 

Here is a table of the dates previous articles were sent to clients, the total drawdown of the market through that particular correction, and the annualized return of the S&P 500 since that time through present day (including the current correction, i.e. not cherry picking data at the top). I want to highlight NONE of our articles were sent to clients at the exact bottom, though a few were within a couple days!

Here is an excerpt of what we said along with the hyperlink to the full article:

·      August 26, 2015 – Making Sense of the Correction: Keep what you need in the near term on the sidelines, stay in stocks for the long haul, and you'll rarely end up regretting it. 

·     February 9, 2018 – The Streak is Over, the Stock Market Correction: Though trying to time market corrections is nearly impossible, they are historically a healthy and normal component of sustained bull markets.

·     December 21, 2018 – Market Update: Staying disciplined through market swings is a critical element in how we build financial plans and portfolios. 

·     March 16, 2020 - Things I Think and Things I Know: Lastly, I KNOW that this too shall pass. In summary, as we move forward in this crisis, we will continue to execute our plan of opportunistic tax loss harvesting, opportunistic rebalancing and dollar-cost-averaging for accumulators, and we will monitor for additional opportunities to add value to client portfolios. For those of our clients that we classify as decumulators - those living off their assets in retirement - this is why we constructed a healthy ‘bond tent’. This is why we ran Monte Carlo analysis on your retirement plans to ensure a high probability of success, accounting for a wide range of market outcomes (over 1000 iterations).

Three takeaways from the prior four corrections:

1.  There will ALWAYS be valid reasons why the market is down. The market will not go through a correction without legitimate concern occurring or feared to occur.

2.  Staying invested or adding to portfolios during market corrections has worked over the long term.

3.  This too shall pass. The biggest concerns of today will inevitably be resolved over time, and new concerns will take their place. That’s the nature of a complex human global economy. 

The market stands on the shoulders of every crisis in the past and has continued to be an excellent compounder of wealth for those who diversify and stay invested for the long term.

Andy Michael, CFA
Portfolio Manager