As the media has reported ad nauseam, the first half of 2022 was the worst start to a year for the U.S. stock market in over 50 years. Additionally, it was the worst start for the bond market ever. We are currently in a bear market (usually defined as declines greater than 20%), with the S&P 500 Index (SPX) posting a total year-to-date return of minus 19.96% as of June 30, 2022 (with the SPX down 21.08% from its January 3 peak). This is not something to be feared, just understood. We’d like to share five important points to maintain good perspective:
- The history of the market is still being written. “Worst ever” and “best ever” will continue to occur and dominate the headlines. The print, TV and online media will have a heyday with it. We simply accept it as a fact of life and choose to stay out of the mess.
- While bear markets are very uncomfortable and can instill fear, they are an essential elementof healthy capital markets. They squeeze out the excess, encourage companies to become more efficient and pave the way for the next bull market.
- The greatest asset an investor has is personal choice. We cannot control (nor predict) markets or macroeconomic things like inflation or recession, but we control how we respond. Some will seek “safety” and choose to sell in the face of losses. We think it is far better to exercise patience and “strategic ignorance” – choosing to ignore and cultivate an attitude of indifference to financial news and account values until these things get worked out.
- Investor angst is at an all-time high. $5/gallon gas is constantly in our face and the combination of sky-high inflation, the Federal Reserve (Fed) aggressively tightening credit and a potentially looming recession has crushed investor confidence, which is at a 10-year low. Don’t get shook. If history is any guide, and there is no guarantee it is, it’s not uncommon for stocks to have sharp rebounds following horrible half-years like the one we just experienced.
- According to Bespoke Investment Group, the first half of 2022 was just the eighth time since WWII when the SPX dropped 20%+ in a two-quarter span. As shown in the table below, the SPX was up the following quarter in six out of the prior seven occurrences (average gain 8.5%), and the following half- (21.5%) and full-year (31.3%) all seven times.
5. As we stated in “Our Thoughts on Recent Market Volatility” (June 14, 2022), we invest in businesses, not ticker symbols. The businesses we own are profitable now, generate more cash than they consume and generally have “pricing power.” They also generally have “clean” balance sheets with lower-than-average debt levels. We believe stocks of companies with these characteristics will fare much better in an environment of higher inflation/interest rates than those whose eventual profitability is many years down the road (if at all) and depended on an endless stream of cheap credit.
Why Have a Disciplined Investment Approach?
Past performance is no guarantee of future results, but you have a plan and investment strategy that has withstood numerous bear markets and crises. No investment strategy is immune to temporary losses. The real question is not what will the market do, but what will you do in response? Will you choose to exercise discipline, patience and indifference? We certainly hope so. That will put us in a position to weather the storm and potentially invest in high-quality companies whose stocks are on sale, which could ultimately reward you down the road.
Past performance is not a guarantee of future results.
The S&P 500 Index is an unmanaged, capitalization-weighted index generally representative of the U.S. market for large capitalization stocks. This index cannot be invested in directly.