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The Bear Returns

May 19, 2022
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BLOG: The Bear Returns     

This week, the Bear made his appearance on Wall Street.  A Bear Market is typically when the market retreats 20% from its high point.  The Nasdaq has already fallen by more than that, and the Dow Jones and S&P 500, as of this writing were poised to do the same.  For long term investors, this has always been a normal function of the markets.

The primary function of financial journalism, however, seems to be terrifying us out of ever achieving our financial goals by shrieking about the market’s volatility. We’ve been reminded of this almost hourly as the S&P 500 approaches “official bear market territory.”  The one item they usually leave out is that this is a routine part of long-term investing.

Every market decline of this magnitude has its own unique precipitating causes, and 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 such are surely contributing to the angst, but recession vs. inflation is the main event, in my judgment).

Taking a different look at it (and the correct look at it, in my opinion) is that this is necessary and good for the long-term investor.  Let me explain.

From March 2009 (when the equity market bottomed at the end of the Global Financial Crisis) through the end of 2021, the S&P 500 produced an average annual compound return of 17.5%. Indeed, over those last three calendar years (2019 – 2021), despite a hundred-year global health crisis that carried off millions of people worldwide, the Index compounded at 24% per year. This was one of the greatest runs of all time.

But it’s evident that some part of that extraordinary rise in equity values was due to excessive monetary stimulation by the Fed.  Translation:  The steep rise was unsustainable, and 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) is not more painful than the disease (inflation).  As I mentioned here, this situation is eerily similar to the economy of the late 70s/early 80s when inflation was much worse.  Back then, once they tamed inflation, we experienced the longest Bull Market of all time from 1982-2000.

Let me be clear about the most important takeaway from all this: for long-term investors, capitulation to a bear market by selling out has often proven to be a tragedy from which their retirement plans may never recover. Our investment policy is founded on acceptance of the idea that the only way to be reasonably assured of meeting our long-term goals is to ride out the occasional declines on the market, even when they seem like they’ll never end.  

My mission continues: not to insulate you from short- to intermediate-term volatility, but to minimize your long-term regret – the regret that has always followed a fear-driven exit when equities resume their long-term advance.  As they always have.

I continue to counsel staying the course. I’m always here to talk this through with you.

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.