As I have noted before, the primary function of financial journalism seems to be terrifying us out of ever achieving our financial goals by shrieking about the market’s volatility. As the equity markets approach “official bear market territory,” defined as closing 20% below its January all-time high, this narrative is at a fevered pitch. Of course, even in the best of times, financial journalism seems to search far and wide for the dark lining on the silver cloud.
Every market decline of this magnitude has its own unique precipitating causes. I think it’s fair to say that the current episode is a response to two issues: severe inflation, and the extent to which the economy might be driven into recession by the Federal Reserve’s somewhat belated efforts to root that inflation out. (Russia’s war on Ukraine, supply chain issues and the like are surely contributing to the angst, but recession vs. inflation is the main event, in my judgment.)
I look at it this way:
From March 2009 (when the equity market bottomed at the end of the Global Financial Crisis) through the end of 2021, the equity markets produced a very favorable double digit annual compound return. Over those last three calendar years (2019 – 2021), despite a hundred-year global health crisis that tragically carried off millions of people worldwide, the equity markets continued to compound very favorably.
Note that over this timeline, the equity markets approached or exceeded bear market territory on three occasions – in 2011, at the end of 2018, and most recently in 2020. Along the way there were multiple other intra year corrections exceeding 10%. Yet, this was one of the greatest runs of all time and we were all rewarded for our patience.
Logically, it seems evident that some part of that accretion in equity values was due to excessive monetary stimulation by the Fed. And to that extent, we are having to give some of that gain back, as the Fed moves to bring the resultant inflation under control. We should, I believe, want them to do this, even if it means the economy slows. In the long run, the cure (possible recession) will likely be less painful than the disease (inflation).
For all of us long-term investors, capitulation to a bear market by fleeing equities often has tragic consequences, from which one’s retirement plans may never recover. Our philosophy is founded on acceptance of the idea that the only way to be reasonably assured of capturing equities’ premium returns is by riding out their occasional declines. Correspondingly, if you are able to do so, this is likely an opportune time to consider deploying surplus cash.
My objective remains not to try to prognostically insulate you from short- to intermediate-term volatility, but rather to minimize your long-term regret – the regret that invariably follows a fear-driven exit when equities resume their long-term advance – as they always have.
Thus, with history as our guide, I continue to counsel staying the course. I’m always here to talk this through with you. Thank you for the opportunity to help you navigate this journey… This too shall pass!
Originally authored by financial journalist, Nick Murray and further edited by me. It aligns with my perspective and belief in the importance of remaining diligent and focused on your long term investment and financial planning goals.