It’s been a bleak week and month frankly, with the S&P 500 down nearly 5% on the week as I write, and well over 11% on the month. Current market sentiment is as bad as it has been since the Financial Crisis, which is really saying something given there have been quite a few significantly negative events over the last 13 years. The S&P 500 is now down nearly 24% YTD, while the Nasdaq is down around 32%. Even if you had just invested in conservative investment grade bonds, you’d be down over 16% YTD. These are very significant declines, but they have already happened. The markets are telling you are we in a recession, or will be soon. The volatility index is at a 3-month high of over 30%, so option prices are steep. So, with all this negativity on the table, the investor is left with two choices:
1) Panic, lock-in losses at prices far below intrinsic value and somehow think one can time the market to get back in as it goes up. In my career, I’ve never seen it be a beneficial decision for someone to do this, and I’m pleased to say that at T&T Capital Management, we don’t have one client that has gone that route. Statistically, if you aren’t in the market on the biggest up days, it is virtually impossible to get decent investment performance, and often those days happen when sentiment is terrible like it is right now.
2) Stick to a sound investment plan and take advantage of the extraordinary investment opportunities that are available to us. When we work with a client, we make sure that they have a reasonable time horizon. One might be retired, but they aren’t drawing 100% of their investable assets out in the next year, or anything close to this. This means that they can benefit from staying invested, while still being able to take out their living expenses. You know going into investing in anything that markets will ebb and flow and there will be good years and bad years. Most investors would readily admit that their investment plan includes buying stocks in times of panic when they are truly bargains, but when that actual panic occurs as we are seeing now, the short-term fears that the market could continue to drop further in the short-term, often gets in the way of that decision making. The likelihood is that 3, 5, 10 years from now, stocks are likely to be much higher than they are now. It is less risky buying stocks now when things look bleak than it will be 3 years from now when prices have already appreciated.
Think of people that bought homes in 2009-2016. They had just seen housing prices implode the most since the Great Depression, but people need housing. The purchases turned out to be tremendous bargains, creating substantial equity and wealth. The same can be said for those that bought and held stocks in 2009 during the Great Recession, 2011 during the European Sovereign Debt Crisis, 2016 Brexit, 2018 Bear Market, and March of 2020 during the Covid-19 panic.
When I look at the current economic environment, I see a functioning economy for the most part. Hotels, restaurants, airlines, are open and busy. Yes, people are starting to feel the impact of inflation and are having to adjust some of their decision making and spending habits. Unemployment is low and the labor market is tight. However, the sick predicament the Federal Reserve is in, is that they basically want unemployment to increase to “crush” inflation. I believe this might be a mistake because the Fed is moving so fast, instead of allowing the market to digest these rapid increases in rates. The early indicators mostly point to inflation declining in the near future, with commodity prices leading the way.
The war in Ukraine is causing chaos in energy markets, which will cause businesses to close without government assistance. They will have to step in there and they almost assuredly will, as this is certainly not the fault of citizens that this war is occurring. Higher rates are definitely going to cause chaos in the housing sector. Prices are just starting to come down and will likely need to adjust further. Remember, the market is already down 24%-32%. It has never paid to panic sell in that type of selloff but it has paid to buy, which is what we are doing when we methodically get exercised on sold put options at absolute bargain prices. Hopefully we are close to that inflection day where the market reverses from a big down day, which often occurs at stock bottoms. Sentiment is so bad, it could be close to that reversal but we just need to let things develop. I know it can be hard to get through these really negative stints. The best way it just to focus on other things and let time do its thing.