The market continues to test one’s resolve. In 1933, a quote became famous when President Roosevelt said, “…the only thing we have to fear, is fear itself”. This famous quote seems appropriate today as related to the current economic and market environment. The current amount of uncertainty naturally creates a high level of anxiety. Too much focus on the negative can cause irrational decision making and the potential for regret given some time. Though fear is a real and strong emotion, by looking past the current market action and considering the glass half full, we can avoid the decisions of the heart. It is easier said than done, so we will provide some thoughts and data below which can help.
Though there is the typical early market reaction to inflation and higher interest rates to fight it, the fact is that stocks have always been the best inflation hedge longer term. The market has averaged about 9.4% a year since 1928, which greatly exceeds inflation measurements by four to five percent. In fact, when you look at the seventeen highest inflation years, the market was up twelve of those years and up double digits in eight of the seventeen years. In the five highest inflation years, the market was up four of those years. One of the reasons is that some percentage of inflation itself is corporations being able to pass along higher cost, which stabilizes their earnings. Ultimately, this has led to some of the strongest bull markets on record. This is why you have to be an investor and not a trader. There is an old saying that time heals all wounds. This has always been the case for the equity market. Most of you went through 2007-2008 and even recently the pandemic sell off, not to mention the early century tech bubble among other similar times. In all cases, the market recovered given patience, and it will this time too.
Is it October yet? We just need to get there for a couple of reasons. First, the Government fiscal year ends September 30th. In the 12 months starting this October 1st, the third year of a Presidential term, the market has averaged 19.9% historically. Though positive, the other three years in a Presidential cycle have failed to deliver double digit returns. Secondly, the market has performed significantly better the six months after the mid-term elections than it has the six months prior. Also, the market likes the gridlock of the executive and legislative branches being controlled by different political parties, which is likely come November. Volatility will continue for a while. There will be days like today and strong rallies as well. The key is to look beyond it all and know this too shall pass.
If invested, stay the course. If not, or if you have additional investable assets, we view this as a period of opportunity rather than a time to panic. The Warren Buffett philosophy of being greedy when others are fearful will pay off. Another positive indicator is that investor sentiment is as low now as it was in 2009 when the market bottomed March 9th of that year, and started to recover from the financial crisis.
In conclusion, we know times like this are never fun, and they stir emotions that are hard to avoid. Hindsight is always 20/20, but by staying patient and forward looking, the glass is indeed… half full.
Royal Fund Management