Thoughts From the Lake – 2022 Edition

By Jon Aldrich

As I write this from Lake Tomahawk in the great Northwoods of Wisconsin, the local otter is out doing the backstroke and nibbling on something he conjured up from the water, a minute later one of the several bald eagles that we call neighbors is screeching overhead, the menacing raptor has set off the haunting alarm cries that we hear regularly from the pair of nesting loons that are always out patrolling the waters. It is this peace and tranquility here that helps me take a step back and relax, catch my breath, and recharge my batteries, allowing me to come up with fresh ideas and energy. This year, it has been especially therapeutic with how crazy it has been in the markets.

2022 has been a crazy year in many regards, as stocks and bonds are having horrible years. Actually, bonds are registering their worst start to a year, ever! If you kept a lot of cash because you weren’t enamored with the markets, you were getting hammered by inflation exceeding 9%, the highest level in 4 decades. Unless you kept all your money in commodities, which have soared with the rampant inflation, there has been no place to hide.

We may not be out of the woods just yet, even with the nice rally we have had in stocks and bonds the last couple of weeks. However, the latest inflation report showed signs that inflation may have peaked or is peaking, which is great news for everyone. With the Federal Reserve continuing to raise rates to slam the brakes on inflation, the collateral damage will likely be a recession at some point before too long. Have stocks already priced that in, or have they only priced in the inflation scare? That is the million (billion) dollar question. However, I am not going to lose sleep on matters outside my control.

On the positive side, though, If the Federal Reserve does manage to tame inflation, and it creates a mild recession, maybe the worst, is indeed, behind us and that is what the markets have already priced in.  But is this the case? Who knows. As I say at least a hundred times a year, “If I could predict, precisely what the markets are going to do, I would have my own island in the Caribbean.” So, we are left to wait with bated breath as to what is going to play out.

Either way, what happens in the short-term is largely inconsequential as we should be focusing on the longer term. The randomness of the short term is impossible to predict, but we can look back through history to see the results of investing for the long-term and that tells us that having exposure to the stock market is one of your best chances at growing your wealth and keeping up with inflation. We just have to take the bad with the good and that means navigating bear markets from time to time.

How Long Does it Take to Recover From Bear Markets?

A question that gets bantered about a lot these days, is how long does it take to recover from bear markets? The answer to that is anywhere from 1 month to almost 20 years after the Great Depression. However, since World War II, 13 months has been the average length of time to reach a bottom and about 27 months to break even. This was with an average decline of 33%, (the S & P 500 was down about 23% near the end of June).  During the Great Recession of 2007-2009 (does anyone remember that?) the S & P 500 fell 57%, but a balanced portfolio of stocks and bonds reached new highs within 2 to 3 years if there were no portfolio withdrawals and a little longer for those withdrawing from their portfolio depending on the amounts being taken.

I’m not going to lie to you, bear markets suck. They are no fun, but they are a reality when you are investing to get better than risk-free returns. As long as you don’t make fear and panic based decisions when things look bleak, you are likely to come out of it and prosper.

However, if you want to think positively about all this, there are some upsides to bear markets:

Advantages of a Bear Market:

• Future market returns are higher. After we go through a period of falling prices, the outlook for future returns automatically becomes brighter going forward, as market fundamentals get better.
• For those accumulating, you are investing at lower prices (we always like to buy things on sale, except most people seem more comfortable buying stocks when they are more expensive for some reason).
• It may help you really define your risk tolerance. Everyone has a lot more risk tolerance in a roaring bull market, but where it really gets tested is in the throes of a snarling bear market.
• You get better at controlling your emotions. After you have lived through several bear markets and seen that things eventually do recover, you get better at realizing that panic decisions often result in bad decisions.
• Bear markets take the froth and speculation out of the markets and sow the seeds for much better underlying market fundamentals rather than prices of assets that defy gravity and common sense.

For me, going to the lake is one way I deal with the unpleasantness of the bear market. Everyone has their own getaways or ways to cope, and I encourage everyone to try to unplug from things when you can and take a step back to regroup. I am going to do that right now as it looks like the osprey that nests nearby is going to do some diving and it is fun to watch!