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Wait till Next Year?

2022 is Shaping to be one of the worst years for the markets in a long time but be patient.

By Jon Aldrich

‘Wait till Next Year”, as a Cub fan, I am all too used to hearing that well-worn phrase over the years, especially since the Cubs season just ended again without making the playoffs. This year, though, that slogan could be applied to the stock and bond markets. As we all know by now, 2022 is shaping up to be one of the worst years for stocks and bonds ever. Stocks are suffering about their 6th worst year ever, while bonds are having their worst year ever. I have written several blogs about this, but I am here today to write about the future.

You're probably tired of me discussing the “long-term’ when it comes to investing, but it really does revolve around patience and thinking about the longer term. Heck, almost 25% of the calendar years since 1928 have been negative or about 1 out of every 4 years. We have been spoiled the last 13 or 14 years as there have been only 2 modestly negative years since 2008, but we have had several 20%+ drops during that time. The key for all this is that the longer your investment time horizon is, the higher the chance of positive investment returns. As the chart below shows for a 60% stock/40% bond portfolio, on a daily basis, there is only a 51.24% chance of the market being higher on a given day. For a given month that is 64%, for a year 75%, 5 years 95%, and 10 years 99%. As you can see, there are going to be plenty of short-term negative periods we will need to navigate as investors, but if we stay in the game longer, the odds of success dramatically improve.

Source: www.ifa.com

We still probably have some time to go to get through this bear market, and stocks and bonds could certainly fall further. We just don’t know what they are going to do over the next few days, weeks and months. Most likely, markets will not start recovering until the Federal Reserve stops raising rates, but we don’t know for sure when that will be. Timing the market is very, very difficult, and in situations like these, if you miss a few days, sometimes, you miss out on a large chunk of the returns:

  • What if the next inflation report comes out a lot cooler than expected? This would lead market participants to believe that the Fed may pause raising rates, and the market could take off like a rocket for a few days, or even be the start of the next bull market.
  • Or, say, somehow, the war in Ukraine ends, this could be another item that could cause a sharp, swift rally in stocks.
  • You just do not know, and if someone does tell you they know what the market is going to do, they are just blowing smoke up your you know what or trying to sell you a newsletter with an abysmal track record.
  • Since no one can predict what the market is going to do, having an asset allocation you are comfortable with and sticking with it, even when things look absolutely like the world is ending, is how you navigate the wraths of a bear market.

So, let’s consider 2022 a lost cause for market returns, but we can always look towards the future. One thing to consider is looking at how stocks did after the S & P 500 has dropped 25% from it’s highs (the situation we now find ourselves in). As the following table shows, this is the 9th occurrence since 1950 of the market being down 25% or worse. However, just look to the right side of this table and look at what investment returns were 1, 3, 5, & 10 years later. In all but one instance, returns were higher 1 year out and on average almost 22% higher, and in all times at 3 years out, the markets were higher, and the average increase was almost 37%. Of course, the 5- & 10-year returns are even better.

We also have the mid-term elections coming up. (Please give me more of those nasty campaign commercials from both parties that are rolling non-stop on T.V. (sarcasm). Historically, the period after mid-term elections (the 2nd year of the Presidential Cycle) has been a good period for stock market investors. Every single time since 1946, the market has been higher a year later an average of 14.1%. Sure, there are a couple of instances where the market was only up a fraction, but it has been higher every time. Of course, that is no guarantee that the market will be up a year from now, but between the markets being down 25% already and the mid-term cycle coming into play, I would have to say the odds do not look too bad.

Bear markets tend to be long, grueling affairs for investors, that eventually beat you down and wear you out. You start seeing headlines and magazine articles such as the famous Business Week article in 1979, that appeared right before the long bull market of the 80’s and 90’s embarked. But, if you want to have the best chance at beating inflation over the long-term, stocks are going to be one of the investments that give you the best chance of accomplishing this. You just have to be able to hold on as the ride will often be rough.

Also, as I mentioned in in my last post, Bonds are also as attractive now as they have been in 15 years or so. Opportunities will be presenting themselves to investors, but we need to remain patient. It will not be easy, and you are likely to experience some fear and panic until things improve. We have done this before and made it through and we will do so this time as well. Navigating markets like these tend to make us all better investors.