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Life, The Universe and Everything

Third Quarter 2022

September is historically the worst month for U.S. equity markets – and this September did everything it could to reinforce that trend. When the final bell closed out September, and the third quarter as well, markets were significantly lower than where they started the month. This felt like the third strike as that marked three quarters in a row of negative returns for the S&P 500 – the first time since 2009.

For the month of September, sector performance was just terrible as all 11 sectors declined for the month with 5 of the 11 recording double-digit declines. In keeping with U.S. markets, developed markets outside the U.S. stunk in September too – as all 37 developed markets tracked by MSCI were negative. Performance of the emerging markets tracked by MSCI was also abhorrent, as all 46 of those indices declined. Put another way, of the 84 markets tracked by MSCI, 84 were negative.

At home the S&P500 is down almost 24% for the year, while abroad the MSCI EAFE index is down over 29%. The Vanguard Total Market index and ETF are down about 24% and the NASDAQ is down over 32%. Many of the biggest companies in the US and internationally are worse. Walt Disney’s stock as well as CitiBank are down about 39%, the airlines are down over 25%, casinos and cruise ships are down anywhere from 50%- 80% (Royal Caribbean and Rush Street Interactive). Meta (the old Facebook) is down over 59%, Amazon is down 32% and Google is down almost 34%. For the quarter, as far as the old FANG stocks go, only Netflix was a shining light up over 30%…yet it’s still down over 60% for the year!

To add insult to injury, there has been nowhere to hide from the carnage. Yes, the stock market has been gruesome, but the supposedly “safe” bond market has had the worst year in US history. To place it in perspective, the 5-year treasury bond yield has risen this year from 1.37% to a whopping 4.06% at the end of the quarter. The 10-year US Government Treasury bond hit a yield of .318% in 2020 (a level that had not been seen since 1945) and today stands at 3.83%. As an increase in yields impacts bond prices (they act like a teeter totter so when rates go up the price of existing bonds goes down) the average bond ETF has a decrease of over 14% ytd. Investment grade bonds dropping 14% in a 9-month period is unheard of. Heck, gold, the supposed ‘INFLATION’ hedge is down over 9% ytd. Even the new age investments, the mis named crypto currencies, have seen one after another either collapse in price (TerraUSD which was supposed to be a stable value coin…i.e., trade at a set dollar value dropped to ZERO) or decline precipitously. Solana is down 84% ytd and the largest player, Bitcoin, is down about 60% ytd. (It is really down 72% since last November’s high or ~$69,000 to ~$19,000 !!)

Ok, we can say it. The stock and bond markets, commodity (except oil) and crypto markets have been overall HORENDOUS in 2022. Never in modern history have we seen the devastation that has occurred to earnings multiples and prices in such a short period of time. (Of note, in 1987 the S&P500 dropped 22.6% over a week but finished the year up over 5%.) We are in a real, and a technical, BEAR MARKET for almost all investments. It is painful.

With that said, is this different than in the past?

The answer is not really.

First, Bear markets, while generally different in nature, have been a normal occurrence for the last 90 or so years. As a matter of fact, there have been 26 Bear markets since 1928. There have been 27 Bull markets too. Stocks lose roughly 36% of their value in an average Bear market. Second, the average length of a Bear market is about 9.5 months while the average length of a Bull market is almost 3 years. Third, there have been Bear markets, on average, once every 5.5 years since 1945 - that’s 14 Bears. Before that they occurred every 1.4 years which honestly would have been nerve racking. History shows us that when Bear markets happen they are fierce, rapid and, as mentioned, painful…while Bull markets are erratic and slow. But Bear markets are NORMAL.

I was taught a long time ago that when you are confronted with a problem you should come up with a solution rather than just complain. So, where to start?

History shows us how to react. It shows that there will be a recovery in the markets and that the stock market will grow past its previous high-water marks.

So, stay the course.

Now it’s hard to stay the course when the media spokesmodels, Wall Street analysts, self-important investment gurus, and your friends that never invested after the last Bear market are all doom and gloom. Unless you have a crystal ball, or are just plain lucky, short-term thinking does not give the same returns that long-term investing does.

Everyone knows the name Warren Buffett, the king of buying good businesses on the cheap and holding them for decades, but how many of us personally know a short-term trader that has done as well? I don’t know a single one. Wonder why? Because there are none. If there are, I can’t name any with the track record of Buffett.

So, stay the course, think long term and…. this is big…don’t abandon your strategy. If your strategy calls for a large equity allocation stick with it. Get your portfolio back to the targets that you have set. If you liked a company last year when its stock was double the price it is today, why wouldn’t you consider buying it now? It’s on sale! Half off! Take advantage of what history has shown to be opportunities.

Interestingly many seem to “pull in their horns” when the markets go into Bear territory. They buy bonds and think they will “hide out” in the safety that bonds offer. Aside from the fact that bonds are down the most they’ve ever been in one year, looking at a comparison of the returns over time of the S&P500 to the Vanguard Total Bond Index, one might question that change in strategy.

What this chart shows is the total return for the period of the last ten years. Bonds have given you a cumulative return of 8.5%. Less than 1% per year…and that has been a taxable return…so less than zero return after tax. The S&P500, on the other hand, is up almost 200% even with this year’s 23% pull back. Over a longer period, including a housing crisis, a world financial crisis and two recessions (see the grey bars in the below chart) the results are even more remarkable.

I believe this argues to stick with your plan. Invest for the long term. Historically long-term investors make more money in the stock market and time in the market is more important than market timing.

So where does this leave us? It’s obvious that the year has been difficult, at best, for almost every investor. It’s also obvious that we go through these periods, come out the other side, and then climb to new heights. Remember this is just one snapshot in time. My wife joked with me that if she remembered how painful childbirth was, we never would have had more than one child…and we have three. Pain seems to reward those who endure.

The foundation to investing is a plan. Stay the course. The 26 Bear markets we have experienced in the last 92 years lasted about 20 years in total. This MEANS THAT STOCKS GO UP ABOUT 78% OF THE TIME. Often, Bull markets rise from Bears when things look the most bleak. It is bleak right now, so remember…History is on our side.

Information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information.

A professional adviser should be consulted before implementing any of the strategies or options presented.

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