Bull Market Problems
August 2021
Summary
- On August 16th, the S&P 500 Index officially doubled from the deepest depths of the pandemic. The rally has been powerful, surprising, and mostly discredited the entire way.
- In recent conversations with investors, I’ve heard a common question: “Should we wait for a correction to invest?”
- While numerous risks exist today, nobody knows what is going to happen next. Still, investors with a long-term focus can gain a significant advantage against these risks.
- I encourage clients to let their investment decisions be guided by the headlines in their lives, rather than the headlines on TV. But, it can be difficult when the stakes to our personal well-being are high.
- Our emotional response to investing is perhaps the most overlooked aspect of our financial lives. Yet, I believe it is my most important responsibility to our clients and their success.
On August 16th, the S&P 500 Index officially doubled from the deepest depths of the pandemic. 100% in 354 market days. It is the fastest doubling of the stock market since World War II. Of course, we had to endure the fastest 30% decline ever to set up that record. But, let’s be honest: Who saw this coming?
The rally has been powerful, surprising, and mostly discredited the entire way. It is often said that bull markets climb a wall of worry, and today, there are many bricks stacked in that wall: Inflation, Delta variant, debt ceiling, Fed tapering, peak everything, tax increases, China crackdown…
While the risks above are all clear and present dangers, whether they derail the economy and the markets is just someone’s prediction of the future. On the other side of the wall of worry, our team sees reasons to be optimistic about the rest of 2021 and for 2022: Monumental liquidity from monetary and fiscal stimulus, low interest rates and mortgage rates, pent-up demand created by the lockdown, U.S. household balance sheets are in terrific shape…
But, it’s worth recognizing that the lingering concerns during a record bull market highlight that uncertainty is always present, even in best-of-times markets.
In recent conversations with investors, I’ve heard a common question: “Should we wait for a correction to invest?” I’ve heard it from both professional and non-professional investors alike. It is a common hesitation, particularly when trying to allocate capital after a recent period of strong performance.
After 11 years in this business, I have not met anyone who can consistently predict market tops or bottoms. I’ve seen people get it right once or twice, but rarely do they get it right more than that. The problem is two-fold: we don’t know when a correction will happen, and we don’t know when it will end. When you’re in a correction it looks like a risk, but when you look back on a correction it looks like an opportunity. Hindsight is always 20/20.
Legendary fund manager Peter Lynch summarized it beautifully: “More people have lost money waiting for corrections and anticipating corrections than in the actual corrections.” Based on my experience as an advisor, I have to agree with Mr. Lynch.
Most people know that maintaining a long-term outlook is the right strategy for their portfolios, their careers, and their relationships. These are the things in our lives that compound and that growth is worth waiting for. But keeping a longterm focus is easier said than done. Particularly in a world where we can make important money decisions with a few taps of our phones from anywhere and at any time we feel the need to make a change.
It’s inevitable that there will be market declines, corrections, and, sometimes, crashes that will put your investments to the test. Although history offers a partial guide, these events are unknowable in terms of when they will occur, the magnitude of distress they can inflict, or how long they will last. These brief periods of stress, unfortunately, are part of what makes up the long-term.
Today’s problems will ultimately fade. Our country and the stock market has overcome worse, including World Wars, economic depressions, and presidential assassinations, and previous pandemics. While there is no magic investment strategy or asset allocation that can fully guard against uncertainty and future volatility, investors with a long-term focus can gain a significant advantage against the short-term noise.
As much as I encourage our clients to let their investment decisions be guided by the headlines in their lives, rather than the headlines on TV, it can still be difficult to ignore the excitement and suspense that the financial news networks deliver us each day. And when the stakes to our personal well-being are high – such as building a family legacy or enjoying retirement — investors justifiably want as much information as possible.
But successful long-term investing is more than choosing the right investments or timing the market. Your returns are also determined by how you respond when the world gets crazy. It doesn’t matter if you have the perfect investment strategy if you bail at the exact wrong time. If you want a strategy to compound for you, then you must stick with it through thick and thin.
Our emotional response to investing is perhaps the most often overlooked aspect of our financial lives. It is the one of the last frontiers of the investment landscape that hasn’t been solved by formula-wielding academics. Yet, the more experienced I become, the more I feel that keeping emotions out of money decisions is my most important responsibility to our clients and their success.