As the S&P 500 would enter “official” bear market territory on a close below about 3,840, we thought it might be useful to give you an interim update. Financial journalism seems to have intensified its commentary about the market’s volatility, inflation, and Fed policy, along with the war in Ukraine.
Every market decline of this magnitude has its own unique precipitating causes. We think it’s fair to say that the current episode is a response to two issues: severe inflation, and the extent to which the economy might be driven into recession by the Federal Reserve’s somewhat belated efforts to root that inflation out. (Russia’s war on Ukraine, supply chain issues and the like are surely contributing to the angst, but recession vs. inflation is the main event, in our judgment.)
We look at it this way:
From March 2009 (when the equity market bottomed at the end of the Global Financial Crisis) through the end of 2021, the S&P 500 produced an average annual compound return of 17.5%. Indeed, over those last three calendar years (2019 – 2021), despite a hundred-year global health crisis that took the lives of millions of people worldwide, the Index compounded at 24% per year. This was one of the greatest runs of all time.
It is evident, however, that some part of that extraordinary accretion in equity values was due to excessive monetary stimulation by the Fed. To that extent, we are having to give some of that gain back, as the Fed moves to bring the resultant inflation under control. We should want them to do this, as we stated in our last bulletin, even if it means the economy slows. For in the long run, the cure (possible recession) is not more painful than the disease (inflation).
For long-term investors, capitulation to a bear market by fleeing equities has often proven to be a tragedy from which their retirement plans may never recover. Our investment policy is founded on acceptance of the idea that the only way to be reasonably assured of capturing equities’ premium returns is by riding out their occasional declines.
Our mission continues: not to insulate you from short- to intermediate-term volatility, but to minimize your long-term regret – the regret that has always followed a fear-driven exit when equities resume their long-term advance. As they always have.
We continue to counsel staying the course. It is never easy to remain invested when global macro events appear to be magnifying and imagining a resolution to today’s issues is hard to see. We don’t know how or when this current period will end or whether it will deepen from here—just that we have perfect confidence that it will end, setting the stage for the next period of economic prosperity. We’re always here to talk this through with you. Thank you for being our client. It is a privilege to serve you.
P.S. You can demonstrate the compound returns above to yourself with DQYDJ’s S&P 500 Return Calculator. The underlying data are from the Nobel laureate Robert Shiller.
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