Dear Clients & Friends,
When will this end? The honest answer is - I don’t know. The reality is that when spiraling momentum like this occurs (or unwarranted exuberance during hot markets) behavioral finance takes center stage while metrics and analytics step quietly aside. However, we are not stepping quietly aside. We have already taken several steps during this train wreck. But today, our primary purpose is to provide some data and context in order to re-assure everyone that nothing is wrong with your portfolios.
We’ve recently hit a milestone – albeit, not one that we really enjoy experiencing. The S&P 500 is officially in bear territory, down more than 20%. This is the 6th time in my 20+ year long career in which the broad markets have declined this much. The Nasdaq is even worse, down more than 30%. The bond market, our boring slice of the pie, is down as well. Oye Givult already! If anyone cares if I’m sleeping peacefully, I’m not! But, hopefully, we are awake at night so that you don’t have to be.
The headlines are certainly exacerbating the stress. Inflation is nearly at a half-century high, as are gas prices - it’s costing me over $80 to fill my little Volkswagen. We’re witnessing a senseless war, corporate greed has caused a substantial supply chain problem, and the list goes on and on. To make matters worse, the flow of honest information has collapsed. A quarter of the people in our country think that vaccines are a hoax. Many of the same people believe that our election process is rigged. Fake news is widespread and has gotten so bad that, in an article published by Scientific American, only 66% of millennials are “certain” that the earth is spherical (that statistic scares me even more than the market does). Why is this important? Because trust in our basic systems is deteriorating, which makes the market and our economy excessively volatile. And headlines are contributing to that effect.
Though the risks are indeed real, the current market environment is about the economy, not the headlines. So, as I often say, let’s jump in…
Severe market declines are not uncommon once the market falls below a certain threshold. This is often due to recency bias, which is the human tendency to over-emphasize recent events, as well as the belief that the current state will continue and increase in magnitude. This is what causes people who cannot master their emotions to make short-term decisions that are contrary to the best interest of their long-term financial plan. Examples of this behavior are buying into the market when it’s too hot and selling when the markets are too low. This is what keeps me up at night - the possibility that clients of ours could decide not to buy into dips, and instead decide to sell out of them at low points. It hasn’t happened yet during this crisis, but it has happened 3 of the last 5 times that I’ve witnessed a downturn of this magnitude.
The first issue at hand, and the elephant in the room, is inflation. Inflation has been peering around the corner for years. More than a decade of extremely loose monetary policy, the COVID stimulus, and near zero interest rates during the pandemic have all added substantial liquidity to the system. The inevitable result is inflation. “Inevitable” is the operative word here. No one could have predicted when, but most financiers saw it coming.
Unfortunately, there is no magic bullet to curb inflation. The Fed recently raised interest rates (which makes money more expensive) in an attempt to slow down the economy and keep inflation under control. But slowing down the economy is what everyone is worried about. The impact of this is most easily seen in mortgage rates. The Fed raises interest rates, mortgage rates follow, and homes become more expensive to buy. Fewer homes bought = lower home prices. So, the tools that the Fed has at its disposal are not without consequence. They have an extremely delicate set of options to balance, and their goal is to limit the negative impact in the short run in order to stave off debilitating conditions in the long run - like inflation in the 70’s and 80’s when mortgage rates were near 15%.
Fortunately, the Fed is clearly committed to keeping inflation in check, even though their actions will cause short-term pain. Unfortunately, pain is still pain, and rising rates are painful. In my opinion, long-term rates have probably matured, whereas short-term rates will probably continue to rise. This is why we are not removing bonds across the board from our portfolios. Short-term bonds haven’t moved too much, and long-term bonds have already moved. As growth slows, the possibility of recession increases, which will cause markets to expect a drop in rates, which will probably mark the start of a recovery. When will that be? If only we knew.
In the meantime, the best thing we can do is patiently not break discipline, and buy into a low market even if we don’t think the bottom has arrived. No one can predict the bottom. We’re either early or we’ve missed the opportunity. Over the past two weeks, we’ve made a shift of roughly 5% from bonds to stocks; if the market continues to decline, we will likely do it again. It will make everyone’s portfolio marginally more volatile. But today is point A, and the day the recovery is complete will mark point B. No matter what happens in between, someday we will connect the dots - A to B, and it will look like a great move. But it’s going to take time, patience, and discipline to make it to point B.
Consider this: the 12 months that followed the low point of the 2008 housing crisis posted a 67.8% return on the S&P 500. That didn’t even get the market back to its pre-crisis starting point. But if anyone missed that initial recovery, their portfolio would have been forever damaged. Not necessarily irreparable damage, but damage nonetheless. Our priority right now is to discourage anyone from doing that!
This is terrifying. All of the staff here at MORWM are investors too, and most clients know that we own many of the same investments as our clients. So, believe me, we feel our own pain, and the pain of the 150 families that we represent. Misery loves company, right?
Stay focused. Call us with any questions, or just to shout vulgarities as my calm, wise father did with me last week. It was actually pretty hysterical. We blew off some steam, made some silly and vastly inappropriate comments about the market, laughed with one another, and went on our way feeling just a little bit better.
Sending calm wishes for a lovely Father’s Day weekend,
- Everyone here in the MORWM home office
Matthew Ramer, AIF®
Principal, Financial Advisor
MOR Wealth Management, LLC
1801 Market Street, Suite 2435
Philadelphia, PA 19103
P: 267.930-8301 | c: 215-694-4784 | f: 267.284.4847 |
601 21st Street, Suite 300
Vero Beach, FL 32960
email@example.com | www.morwm.com
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