MARKET OUTLOOK
This special edition of our semi-annual newsletter is to address the current bear market for stocks and the threat of a recession. The questions on most investors' minds are: "How long will it take for my investments to come back up?" "Should I be making any changes to my investments?" "If I was planning to retire soon, can I still do so?" "Should I stop making contributions or should I get out until the market improves?" We hope to answer these questions and offer important reminders to help you as we navigate through these challenging conditions.
In our July newsletter, we wrote about the historic return to high inflation and the Federal Reserve's response by increasing interest rates after being around 0% for nearly two years. We also spoke about the threat of an economic recession, causing stocks to decline into bear market territory. As of 9/30/22, the S&P 500 is down 23.9% for the year. Other than brief pullbacks, this is the first time in roughly 14 years (since 2008) that we've had to deal with (prolonged) bear market conditions. Prior to that, we had earned double-digit rates of return on our investments in many of those prior 14 years.
It is likely we will experience a recession in 2023 and a further decline in stocks. Though recessions and bear markets are not one and the same, they usually go hand-in-hand. Stocks typically peak months before a recession. But neither recessions nor bear markets have historically lasted very long. Looking as far back as 1950, the average length of a recession is about 10 months. As measured by the S&P 500, the average decline of stocks in a bear market looking back to 1949 has been -33% and lasted 14 months. So it wouldn't be unusual if stocks don't rebound until 2023 or later. Though recessions and bear markets are painful, the expansions to follow have been powerful. Recoveries have historically been much longer and stronger than downturns. Since 1949, bull markets have averaged a gain of 279% and lasted 72 months.
Long-term investors holding a properly diversified portfolio in line with their goals and risk tolerance are likely to benefit from a market recovery when it comes. In the meantime, a review of the portfolio allocation for possible adjustments is advisable if none has been made in the past 12-18 months OR if goals and risk tolerance have recently changed. Having an all-weather portfolio containing defensive sectors and dividend payers makes sense moving forward as does a proper fixed-income (bond) allocation and/or owning fixed annuities to diversify a portfolio. This doesn't mean you won't experience market volatility, but it could offer some downside protection.
For those who have recently retired or are due to retire soon, little should change if you already have a solid retirement plan and a properly aligned portfolio. After all, who uses all of their retirement savings in the first month they retire? In fact, most are still long-term investors who may withdraw only the dividends, interest, or a small portion of the account each month. That affords them the opportunity for the majority of the portfolio to stay invested and wait for the rebound.
In the meantime, investors should avoid common mistakes such as trying to time the market or shifting a portfolio into cash in an attempt to avoid further market losses. These strategies can backfire. To get out of the market now and go to cash would mean you would incur losses. Eventually, you have to get back in the market to negate those losses. But when would you get back in? You have to get back in at a lower level than when you got out. If you don't, you make matters worse or increase those losses. That's usually when things look and feel even worse. Psychologically, that's the exact opposite of what most investors are inclined to do. In looking at the past 10-year period (1/1/2012 to 12/31/2021), going to cash and missing just 10 of the best days in the market could have resulted in 44% in missed value. Missing just 30 of the best days would have increased that loss of value to 67%.
Don't assume today's negative headlines make it a bad time to invest by focusing on the short-term. Some of the strongest returns occur in the late stages of an economic cycle - when it feels the worst and before the headlines improve. Instead, investing on a regular basis ("dollar-cost averaging") takes the guesswork out of when is the right time to invest. Additionally, don't overlook the buying opportunities presented to us during a bear market. We, as consumers, never turn down a 20% coupon to our favorite department store or reject a discount when buying a car or prefer to pay above list price when buying a house. Then why do we do this as investors?. If stocks are down more than 20% and you can buy 20% more shares with your investment dollars, why wouldn't that make sense if you are still a long-term investor?
Recessions and bear markets are NORMAL AND TEMPORARY. Actions driven by fear and emotion can hurt investment outcomes more than a temporary recession or bear market. We encourage you not to get caught up in the hype, headlines and pessimism. If we make good decisions in times of stress, we can potentially set ourselves up for strong returns in the years to come. Remember, we've been here before - it's just been a while. Also remember what worked last time. Those of you who were invested in 2008 and rode it out most likely benefited and are still much better off now than you've even been.
As always, if you have unanswered questions or want to review your portfolio allocation, please call our office.
Sources: Capital Group/American Funds; Cypress Capital.
Disclaimer: The opinions expressed herein do not necessarily reflect those of Trustmont Financial Group/Trustmont Advisory Group. Additionally, the information contained herein has been obtained from sources believed to be reliable but the accuracy of the information cannot be guaranteed. Lastly, reference to any product, service or concept in no way implies that it is suitable for everyone. There may also be risks and costs associated with any product, service or concept mentioned herein. Where applicable, a prospectus should be read for complete details. The material presented here is neither an offer to sell nor a solicitation of an offer to buy any securities. Past performance is not a guarantee of future results. Dollar cost averaging does not assure a profit or protect against a loss. Diversification can help an investor manage risk and reduce the volatility of an asset's price movements; however, no matter how diversified a portfolio is, risk can never be eliminated completely.