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A Blessing Quite Effectively Disguised

May 03, 2022
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In 1945, when Winston Churchill was defeated in his bid for re-election as England’s Prime Minister, his wife, Clementine, tried to cheer him up by saying that the defeat “might be a blessing in disguise.”  Churchill replied, “At the moment it seems quite effectively disguised.”

When the markets, and your portfolio’s value, are dropping it’s hard to sit back and find a “blessing in disguise” but there are plenty to be found in the current events.  Let me explain.

First, it helps to understand what is happening.  In a nutshell, we find ourselves in a high inflation environment, in large part because the Federal Reserve expanded the money supply far too much, and for far too long.  A basic definition of inflation is when “too much money is chasing too few goods,” and here we are.

When the COVID-19 pandemic began, the Fed (correctly, in my opinion) flooded the economy with money to prevent a financial disaster.  It worked.  The economy suffered only a brief and rather shallow recession from the shock of the pandemic, and the markets returned over 20% for three consecutive years, which is both unheard of and unsustainable.[1]

Unfortunately, the Fed kept the “easy” money flowing for too long, and inflation ensued (other reasons for our current high inflation exist, such as supply chain issues.  However, for the purposes of this discussion we’ll leave it at the Fed’s actions).  The Fed is now faced with the necessary but unpopular task of withdrawing the excess money from the economy.  Part of their effort to get inflation under control is to raise interest rates, which is painful for markets in the short-term.

Blessings In Disguise

First, the Fed’s efforts, and the resulting disruption of the markets, is necessary for the long-term health of the economy and the markets.  The last time we found ourselves in this scenario was over 40 years ago when inflation was much higher than it is today.  The Federal Reserve was then headed by Paul Volcker who raised interest rates as high as 20% before inflation was tamed.  Those of us who are old enough to remember will recall getting 15% CD rates at the local bank.  With inflation dead by 1982, the nation went on to experience the greatest bull market of all time, from 1982 to 2000.

Those of you who have been with me for a long time know I generally suggest two ways to handle a market correction: add to your investments or do nothing. This leads me to the second blessing in disguise, which happens if you’re still working and contributing to your investments. 

This year, you’re able to purchase many more shares of investments than you were able to last year.  For example, a purchase of 100 shares of SPY, as stock that mimics the S&P 500 Index, on December 31, 2021, would have cost you $4,619.  Today you could purchase 114 shares with the same dollar amount.  Both purchases, down the road, will likely be higher.  But the shares you purchase today, at a cheaper price than last year, will be worth more. 

If you’re not able to add to your investments, doing nothing is also effective.  While we have no idea when it will happen, this latest crisis will eventually end and it is best not to overreact to something that is likely temporary.  It’s important to have a solid plan in place and keep with it through all types of markets.

As always, I’m here to help.  If you have any questions or wish to discuss this further, please don’t hesitate to contact me.

Regards,

Joe

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.  

Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Investing includes risks, including fluctuating prices and loss of principal.

References to the S&P 500 Index are for illustration purposes only.  You cannot invest directly in an index.

[1] The S&P 500 Index typically returns 8% - 10% on an average annual basis