As I write to you leading up to Memorial Day weekend, we have seen a bunch of volatility in the market. Rarely have we seen quarters with both stocks and bonds down at the same time. From March 1979 to March 2022, only 8% of quarters have experienced negative returns from both U.S. stocks and U.S. bonds. That is 14 out of the last 173 quarters! 1
History shows us that markets have rewarded long-term investors. Think all the way back to two years ago. In March of 2020, the S&P 500 Index declined 33.79% from the previous high as the pandemic worsened. 2 Even if investors were able to time getting out of the market, they were probably unable to correctly time getting back in. As more information became available, the S&P 500 Index jumped 17.57% from its March 23 low in just three trading sessions. Investors who fled to cash to try to time the market may have lost significantly.
As always, there are many headlines with frightening narratives, but which ones are relevant or accurate? Here are a few headlines that demand a closer look:
- Inverted yield curves lead to market downturns: Data actually shows that an inversion may not be a reliable indicator of stock market downturns. In 10 out of 14 cases of inversion, stocks had positive returns in their home markets after 36 months. 3
- When the Fed raises rates, stocks and bonds produce negative returns: On average, U.S. equity market returns are reliably positive in months with increases in target rates. 4 Similarly within bond markets, periods of rising rates do not necessarily result in negative returns.
- Cryptocurrencies are uncorrelated and provide a safe alternative to equities: Crypto markets experienced a sell-off, too; Bitcoin was down more than 40% as of May 12. 5
- Commodities are a great hedge against inflation: Just because commodities were up 25.55% in Q1 doesn’t mean you should go all-in on the asset class. 6 Despite recent positive performance over the past 10 years ending March 31, 2022, U.S. commodities have had a return of -0.70% annualized.
Periods like we're seeing today are not unprecedented, but they can be uncomfortable. It’s normal to be nervous, but you don’t have to be scared.
While the future is uncertain, the quality of your choices doesn’t have to be. When headlines scream "do something," remember lessons learned. It is important to integrate your unique needs into a plan that you can stick with in good times and bad. They can help determine if it makes sense to make adjustments such as rebalancing or tax-loss harvesting. There are things that matter and things we can control. Focusing on the overlap between the two can lead to a better investment experience.
Feel free to contact me at firstname.lastname@example.org if you are interested in learning more and how it may affect your financial situation.
1. U.S. Stocks: Russell 3000 Index. U.S. Bonds: Bloomberg U.S. Aggregate Bond Index.
2. S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment.
3. The data showed a 71% chance (10 of 14) of a three-year positive return following a yield curve inversion. To compare, we measured returns three years following every month-end between January 1985 and December 2014 in each of the five markets based on the local currency MSCI indices. The average chance of a three-year positive return in those five markets was 77%.
4. The Federal Open Market Committee (FOMC) holds eight regularly scheduled meetings per year and may not change the target rate at every meeting. The FOMC may also change the target rate multiple times within the same month. In such instances, we aggregate all changes by month. (link)
5. “Cryptocurrencies Melt Down in a 'Perfect Storm’ of Fear and Panic,” New York Times, May 12, 2022
6. Commodities returns represent the return of the Bloomberg Commodity Total Return Index.
NAVIGATING TODAY AND TOMORROW TOGETHER.
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Scott Voigt is a co-founding partner of Verisail Partners, a fee-only financial planning firm serving individuals, families, and business owners. Verisail Partners is a Georgia domiciled investment advisor firm registered pursuant to laws and regulations of the U.S. Securities and Exchange Commission.
Scott; his wife, Lindsay; and their son, Landon, live in Five Points and are members of the Georgia Club. They enjoy attending UGA football games, traveling, and spending time in the outdoors.