Quarterly Client Update Q2 2022
Happy Summer. Our kids loving the long warm days filled with baseball, ice cream and swimming.
While the kids are having fun, the markets have not been as enjoyable. The S&P 500 was down 16.45% during the 2nd quarter and 20.58% so far this year. The S&P 500 is also down 11.92% over the past 12 months while up 26.16% since June 30, 20191.
One thing investors have learned to expect is uncertainty. While volatile periods like the one we’re experiencing now can be intense, investors who learn to accept uncertainty may often triumph in the long run. Below we have outlined three things that might be helpful as you think about the past few months and look towards the future.
1. These downturns are normal – At the recent lows a few weeks ago the S&P 500 was down 24% so far this year which is higher than the average intra-year decline of 13% but not more than the 30%+ decline experienced in 2001, 2002, 2008, or 2020. We wrote more about this as part of our Q1 email a few months ago. Being in the middle of a down market is not enjoyable and it often feels like the decline will never stop. The news seems to get worse and worse, and the way out is not clear. Despite the difficulty we believe the best approach is to remain true to your investment strategy and to rebalance, as appropriate, and utilize tax-loss harvesting, when applicable. We have been actively making such adjustments this year.
2. A Recession could be coming – A recession is commonly defined as two quarters of negative economic growth. If you look between the lines, the term ‘economic growth’ includes an adjustment for inflation. If economic growth is 5% and inflation is 3% then actual economic growth was 2%. Inflation has been a non-issue for the past 10+ years but everyone is talking about it now. It is important to note that inflation is currently running around 9% so the economy must grow faster than 9% to avoid being in negative territory. For example, in the coming months we could have an economy that is growing at 8% but with inflation at 9%, actual economic growth would be negative.
All recessions are unique and don’t give insight into stock market returns. An anomaly in this recession (assuming we do find out later this month that we are officially in a recession), is that the economy gained 374,000 jobs in June and most places can’t find enough employees or products to sell and summer travel is at record levels. These factors are not common when a recession is imminent. What is not an anomaly is that the stock market usually peaks before the recession officially begins and always bottoms before the recession has officially ended2.
3. Time the market at your peril – One of our core values is ‘Invest in the market, do not attempt to predict it’. We are confident that investing for the long-term works effectively when done with well-defined goals and objectives. There are media outlets that interview various experts who claim to know where the market and economy are headed. We believe this is simply entertainment. It can be tempting to think “I’ll wait this out until things get better”. While this might feel better in the short-term, we do not believe it works over the long term. Even if you knew exactly when the recession will end, that does not give you actionable information about when the market would bottom. The market been down 10% or more during 25 of the past 42 years3. That is a lot of timing the market to get right. We don’t think it is possible or wise to try moving in and out of the market.
Over the past few months, we have had numerous conversations about financial plans and investment portfolios. If you want to review things in detail or check in for a quick update simply email us and we will get something scheduled.
Thank you for your trust and confidence. It means a lot to both of us.
1Source: LPL Research Daily Performance Report 7/1/2022
2 Source: “Market Returns through a Century of Recessions” Dimensional Fund Advisors.
3 Source: JPMorgan Guide to the Markets 3Q 2022
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 is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.