We’ve Been Here Before
Contributed by Doug Walters, Max Berkovich, David Lemire
For many, matters of money are emotional. The daily bombardment of worrying and sad headlines only amplifies these natural concerns. But with US stocks down about 12% this year, it is worth remembering that we have been here before, and the odds are in our favor for better days to come.
We have faced many crises over the years, both geopolitical and economic. Some of those events from the past two decades include:
- The dot com bubble burst
- 9/11
- The Iraq War
- The London subway bombing
- The 2008 Financial Crisis
- Arab Spring
- Russia annexing Crimea
- The Covid-19 pandemic
Each of these events has in common that they were followed by rising US equity markets – not always immediately, but eventually. Over these past two decades, patient investors have been rewarded with a total return on their US large-cap equities (S&P 500) of about 472%. That equates roughly to a 9% annual return or doubling of your investments about every eight years. Not bad for such challenging times!
If this year feels bad so far for investors, that’s because it is historically bad. Looking all the way back to the late 1920’s we see that the first two months of 2022 are well into the top ten worst starts for the S&P 500 stock index. The good news is that the average return for the next ten months of these “bad start years” was nearly 30%. I’m sure at each of those historical points in time, the headlines were bleak, and investor emotions were drained. Yet out of that gloom came high returns.
There is no guarantee that stocks will rebound from these levels next week or even in a month, and that is okay. Patient investors know that the odds are in their favor over the long term, and they are willing to wait for their rewards. When the market rebounds, it can happen fast and without warning. Staying invested in a well-diversified portfolio, particularly during seemingly difficult times, will ensure you do not miss out on all that the market has to offer.
US Stocks fell again this week as investors continued to digest the implications of the war in Ukraine. The market showed occasional optimism when Ukraine or Russia mentioned progress on negotiations, but the situation on the ground is still bleak.
Market Movers
It has been a tough start to the year for investors, particularly growth investors.
- The Russell 1000 Growth index is down 17% compared to its Value counterpart, down “just” 5%.
- Even most bond categories are down as bond yields have risen.
- Gold has been the star this year, up about 9%, proving, once again, that it is a good diversifier in times of stress.
Reiterating Inflation
Another data point on inflation came through, reporting what is already apparent to most consumers. Inflation is not yet abating.
- Headline CPI inflation was up 7.9% year on year, in line with expectations and up from 7.5% a month ago.
- Core CPI (excluding food and energy) was up a more modest 6.4%, also in line with consensus.
- Hopes that inflation pressures would diminish as we exited the worst of the pandemic have been dashed by the conflict in Ukraine, which is creating additional sources of rising prices.
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