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A Long Slog

Markets & Economics Personal Finance

There are not many places to hide in the market right now.

By Jon Aldrich

Spoiler Alert: Your April brokerage and 401k statements are not going to be pretty. Saying April was a rough month is an understatement. The Nasdaq had its worst month since 2008, losing over 13%, the S & P 500 was off over 9% and your average bond fund was down about 4%. Stock and bond markets are both off to some of the worst starts to a year they have ever had.

As I have mentioned many times over the last several months in my musings and in client meetings, we were overdue for a year like we are having, especially after 3 really good years including a phenomenal year in the midst of a pandemic in 2020. Also, going back to the Great recession and market crash of 2008, it has been one heck of a ride since then for both stock and bond investors.

S & P 500 since 1/1/2009

The combination of elevated stock valuations, sharply higher interest rates, high inflation and supply chain disruptions are taking their toll on the stock and bond markets and deflating them a bit. It is also especially painful as often times when stocks go down bonds trend upwards or if bonds are going down stocks are going up. This has been a very difficult market for investors because stocks and bonds both declining almost equally.

It has also been especially difficult as there really has been no place to hide except commodities and a lot of investors don’t have all that much exposure to commodities in their portfolios. Sure, you could keep a lot more cash, but with inflation running over 8%, if you hold cash too long, that is taking a toll as well. In the long-run, stocks, bonds and real estate are generally going to give you the best chance of maintaining your purchasing power over the long run and keeping up with the ravages of inflation.

Hopefully, you have maxed out your I-Bonds as those are yielding 9.62% right now essentially risk-free, but the problem is you can only put $10,000 per year per Social Security number into these. Other than that, it is a very challenging time as an investor, but we have faced challenges in the markets before and will again. But, to get the inflation fighting effects of a stock and bond portfolio, you have to stick with it for the long-term.

Let me refresh your memory of several other occasions we have had since the Great Recession of 2008 when stocks were mired in a decline and double-digit losses, but recovered within a few months afterward. Granted, bonds were generally performing a lot better in these periods, but the good news right now is that you are starting to see much higher yields on bonds and this should translate into better bond returns and higher yields on savings, CD’s and other safe investments in the near future. There is a silver lining in all of this.

  • Feb 19-Mar 23, 2020  lasted 33 days to bottom and dropped 35.4%
  • Sep 21-Dec 26, 2018, lasted 96 days to bottom and dropped 20.2%
  • May 20, 2015 to Feb 11, 2016, lasted 267 days to bottom and dropped 15.2%
  • May 2-Oct 4, 2011 lasted 155 days to bottom and dropped 21.6%
  • Apr 26-Jul 1, 2010 lasted 66 days to bottom and dropped 17.1%

NOTE: All amounts are for the S & P 500

You probably have trouble remembering all these significant market corrections, even though it has only been a few years for some of them. We are currently 118 days into this market tumble and the S & P 500 has dropped a little over 14% so far.  Could it drop further? Definitely. Should we be radically changing things and running for the hills? Probably not. Also, the typical S & P 500 drawdown is 17% during mid-term election years like we are currently in.

Ben Carlson a financial blogger from Ritholz Wealth Management put into pixels the same thoughts I have about all this:

And even if I had the ability to give you the headlines in the future, you probably still wouldn’t be able to make much money on those headlines. No one could have predicted the stock market would rise more than 50% in 2020 and 2021 despite the onset of the worst pandemic in 100 years.

When the markets go haywire, you really have 3 options on what to do with your portfolio:

    • Do more
    • Do less
    • Do nothing

Trying harder and doing more typically leads to better results in many aspects of your life. Study harder and you can get better grades. Put in more practice and you can improve at sports. Go to the gym on a regular basis and you can transform your body.

Investing doesn’t necessarily work like this.

Often times the harder you try and the more you do, the worse your results. It’s counterintuitive but true.

And doing more is often even more damaging when it’s done at the worst possible times.

There is this desire to be a hero when markets get volatile. There are people who want to pick the perfect hedge, nail the bottom, sell the rips to buy the dips and so on.

Corrections and bottoms look so easy in hindsight but it’s impossible to predict them in real-time. When markets are going down, human nature takes the wheel while fundamentals are tied up in the trunk.

And when human nature takes the wheel it becomes much easier to make mistakes. Minimizing mistakes is how you win during a market correction.

 From  https://awealthofcommonsense.com/2022/02/the-3-ways-to-win-during-a-market-correction/

Like the weather in the Midwest, the markets have been lousy this Spring, but we know the weather will get better as summer finally arrives. Sure, it may take the markets longer than a season to recover, but we know over time they will eventually recover, but like thunderstorms in the spring, it can be a bumpy ride, so hold on!