Welcome to the Bear Market of 2022
Napoleon’s definition of military genius. (It works for investors too)
“The man who can do the average thing when everyone else around him is losing his mind.”
This year has been a hard on equity markets. All the major indexes are down, even bonds are down. This week will be the first week in 8 weeks where the market could finish higher. Much like our favorite sports team losing the game or learning our employer isn’t going to pay a bonus this year, watching our investments go down in value can be painful and disappointing. In times like these, our brains can process and be influenced by losses to a greater magnitude than gains.[i]
Year to Date Returns
S&P 500 Index -17.82%
Russell 2000 Index -21.97%
Japan Nikkei 225 Index -7.78%
Shanghai Index – 13.37%
CAC 40 France Index -12.73%
U.S. Aggregate Bond Index -8.95%
What are some near term factors driving market uncertainty, challenging growth and impairing consumer confidence? Inflation is over 8.5%, interest rates are increasing, mortgage rates haven’t been this high in over 12 years. The average price of a gallon of gasoline is over $4.33. China’s zero COVID policy and the war in Ukraine continue to have a large impact on the global supply chain. The speculative market of Crypto currencies lost over $1 trillion in just six months.[ii]
Consumer confidence, as measured by the CCI hasn’t been this low since the Financial Crisis of 2009.[iii] You might be reading all this negative news and think, yeah, my confidence is down too.
What do you do in a market correction or bear market?
What should we do today?
If you are afraid, fearful or nerves after watching the news or reading this article, that is a normal response. It is a normal human response to be concerned when stores of wealth start behaving the opposite of our expectations and the opposite of our experience the past 18 months. Our brains are built to look for patterns. When we find them, it is normal for us to assume they will repeat themselves, again and again in a similar fashion and ignore or discount the reality of change and risk the pattern will not continue repeating.[iv]
In finance, one important lesson for us to remember is that dwelling on a few details or emotions without a greater context of what we are trying to accomplish can lead to mistakes. Markets are not going to repeat the same returns the same way indefinitely. Things change.
Financial Markets, Controls and Processes
- We cannot control the market. The market will give us a price for our assets everyday it is open. Somedays the number it gives us is unrealistic or different from our expectations. (Too high or too low). While we cannot control the prices quoted, we can control when we choose to buy and sell and why. We can align our choices with our specific plan, goals and needs vs. ambiguity, fear and greed of the market.
- Trying to time the market is expensive. Becoming a Monday morning quarterback on your portfolio typically leads to additional investment mistakes, costs, and losses.[v]
- The surest way to mediocrity is to follow the crowd. Stay the course. We empathize with the reality this can be hard to do. If you need help, schedule a review call today. When we hold investable assets, (like stocks and bonds), we assume risk, and we do so for the opportunity to capture future growth and utilization. When? Typically, 5-7 years from now or much longer. We don’t put money in the market that is needed tomorrow.
- Warren Buffett – “Be fearful when others are greedy and greedy when others are fearful.”[vi] Over the past 36 months one of the most followed and successful investors of all time accumulated a massive amount of cash.[vii] (Berkshire Hathaway had over $149 billion of cash in November 2021)
- Buffett has been quoted many times, until recently, that he didn’t see any deals worth pursuing. Many parts of the market he could invest in where simply too expensive in his opinion. His actions in combination with improved market valuations should give investors a contrarian perspective of the market. The selloff is putting some investments on sale that have been trading at very high premiums.
Current Market Valuations
Many parts of the stock market haven’t traded at this level (valuation) since October of 2020. For long term investors and those accumulating investable assets, this is a time to just keep buying. If the market keeps going down, you just keep buying. Remember, we are not investing to make money in 5-7 days. We invest for the opportunity to generate a return in 5-7 years or longer.
When will the Market Bottom?
Knowing when the market will bottom is anyone’s guess. When you hear professional investors and institutions answer this question, they will typically give a range or otherwise avoid a definitive answer despite having teams of highly trained finance professionals with access to the best information and supercomputers money can buy. Consider this a humble reminder of the difficulty in predicting market movements and prices.
When will the Stock Market Recover?
The market rebound following the sharp selloff in March of 2020 took less than 6 months to recover. Going back to the financial crisis in 2008/2009, the S&P 500 took 66 months to recover (over 5 years). It is times like these that the value of diversification into different asset classes and investment strategies will start to show up on your statements.
What does diversification look like? How can you explain and show it to me?
Looking for a visually compelling and personalized report specific to your current holdings? We can also show you the risk and volatility of your investable assets in a visually compelling Riskalyze report. Simply reach out and request a meeting and note your interest in seeing your investment risk in more detail. If you are looking for a new investment advisor and have assets held with another provider, send us a statement with your holdings prior to the meeting.
When will the Bond Market Recover?
As interest rates increase, bond values will decrease. Which means if you go to sell your bonds today, the market will offer you less than the value of the bond at maturity. If you don’t sell your bonds, your bonds will mature and be repaid at the fully stated value. Investment grade bonds and government bonds have historically a very low default rate, and it is rare for bonds to have years where they lose value. Bonds also tend to gain in value when stocks fall. This year might be a year where stocks and bonds both fall in value. Despite this reality, there is no reason to abandon the use of bonds to provide diversification and interest income to investment portfolios.
For more information and advice specific to your bond holdings, send us a statement and schedule a meeting to see if there is a way to better manage your fixed income risk.
Black Swans, Depressions and Market Downturns
While the market is facing a lot of headwinds in 2022, it is easy to forget how far the market has come since 2012 or 2018. While big scary events and market moves are always possible, we do not see a reason the market would fall 50% from current levels. We do not see the main street economy suffering a catastrophic loss in 2022. Consumers balance sheets are much stronger than then have been in a long time and the labor market is strong. The largest challenge we see facing the average consumer in 2022 is inflation.
For more ideas, prospective and advice follow us on social media, check out our blog or apply to become a client.