On May 6, I discussed how to handle the present upheaval in the stock market, noting that the selloff was likely fueled by several distinct investor worries, including inflation, interest rates, the conflict in Ukraine, interruptions in the supply chain, and an economic slowdown in China. However, as a result of these variables continuing to have an impact, the stock market (using the S&P 500 as a point of reference) has dropped by a further 11% since then. Bear market conditions have been met, which are characterized by a decline of at least 20% from the most recent high point.
It is anyone’s guess what will help stocks rebound from here, what with the daily procession of terrifying stories that dominate the news. Yet despite all of the unpredictability, I am keeping Warren Buffett’s insight that “the future is never clear” in the back of my mind. He said that in the stock market, you pay a very high price for a consensus that is upbeat. In actuality, uncertainty is the buddy of the investor who purchases long-term values. As I said in a post that I published on May 6, I totally agree with the following sentiment:
While I anticipate some rough patches in the near future, I have a positive outlook on the years to come. In point of fact, this is the moment for investors to consider expanding their exposure to equities; historically speaking, the optimum time to invest is when you are feeling the worst. Even extremely experienced and successful investors find it tough to take this leap, especially when prices keep dropping, but historically, the biggest returns have been generated by purchasing exceptional firms at marked-down prices and hanging on to them for the long term.
Bear markets may be quite uncomfortable, but investors shouldn’t give up and sell because of them. Investors have been best served over the course of many decades by maintaining their holdings in high-quality firms. They have been even better served if they had the means (and the stomach) to acquire more; after all, the timing of market recoveries is anything if not unexpected. Below is a chart that illustrates how, since 1957, the median return on the market (again, measured against the S&P 500) has been positive one month, three months, six months, and one year after the market officially entered the bear market region. While there have been years in which stock prices have fallen within those time periods, historically speaking, this has been the exception rather than the norm.
After today’s trading, the S&P 500 index is now in a bear market. DOW JONES
Staying the course is the best option, in my opinion, for investors. I have not cut my exposure to equities, nor do I want to do so; rather, I prefer to take advantage of these periods when the market is in dislocation to raise the amount of exposure I have to equities. The idea of my customers incurring financial losses makes me feel sick to my stomach, but I consider the losses that have already occurred in this year to be “paper losses” rather than a real and irreversible loss of wealth. After all, the price of a share of stock on any given day is just an indication of how much money individuals are ready to part with in order to acquire a certain company at that precise time. On the other hand, I am of the opinion that over the course of a sufficiently long period of time, either the stock market will come to represent the actual value of the company or some acquirer will buy it for the amount of money it is really worth. There is no basis for me to expect that things will turn out differently this time.
The fear caused by stories about the macroeconomy is, unfortunately, driving stock prices today, rather than the fundamentals of the underlying businesses. Wall Street has a history of overreacting to economic data, whether the data is favorable or bad. As a result, economist Paul Samuelson is credited with making the famous observation that “the stock market has anticipated nine out of the previous five economic recessions.” Uncertainty is the one thing that the stock market despises more than anything else, and right now we’re up to our knees in it. It is anyone’s estimate of how long it will be until we locate anything that resembles solid ground.
Reasons for Optimism
Nonetheless, there are some silver linings to this cloudy circumstance. The banking system in the United States hasn’t been this robust in decades, unemployment rates are at all-time lows, and consumer balance sheets have been bolstered by recent government stimulus programs (although the savings rate has recently declined, and credit card balances have significantly increased—developments that I will be keeping a close eye on). In addition, unemployment rates are at all-time lows, and consumer balance sheets have been bolstered by recent government stimulus programs. There is a possibility of a recession, but the impacts of one should be lessened if these variables are taken into account.
On a matter of equal importance, market sentiment is at a multiyear low, and consumer confidence is much worse than it was after the events of September 11, throughout the financial crisis of 2008–2009, and during the coronavirus lockdowns. Both of these markers have a long history of acting as excellent lagging predictors of future gains in the stock market. It is possible that consumer confidence may continue to drop from here on out, but it is important to keep in mind that, according to JP Morgan, the average return of the S&P 500 during the next 12 months after the eight consumer sentiment troughs that have occurred since 1971 was 24.9%:
Consumer Confidence and the Stock marketJP MORGAN
In conclusion, and most importantly, the companies that I hold are trading at reasonable prices; this is crucial since valuation is the factor that best predicts future gains on the stock market. At times like this, it is very necessary to place things into the context that they belong in. The headlines we are seeing now are concerning, but they pale in contrast to those we saw during 2008–2009 when many were certain that the world’s financial system was on the verge of collapsing entirely. In a similar manner, in the year 2020, when the coronavirus caused the economy to plummet in a matter of months, investors worried not only for their financial health but also for their physical health. Despite this, continuing through with the plan was the correct action to do in both scenarios, and I do not see any reason why it should be any different this time.
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