The Week in Review May 31, 2022
Then and Now
The 2010s saw one of the best bull markets in modern history. Yet, volatility can never be discounted, as the decade was not without several pullbacks. What was going on then? And what is going on now? The short answer is the fundamentals.
Then—favorable fundamentals
During the 2010s, the Fed kept the fed funds rate at a rock bottom level for much of the decade, as the economic expansion was modest, and inflation was low. Notably, inflation failed to hit 2% for most of the decade based on data from the U.S. BLS and the U.S. BEA.
Moreover, corporate profits rose steadily. In other words, low inflation + low interest rates + corporate profit growth = very fertile ground for equities.
Now—blame it on the Fed & more
Today, the economy is expanding, and corporate profits are rising, according to Refinitiv.
However, a good Q1 profit season, at least for most firms, didn’t prevent a big slide in stocks.
Unlike the 2010s, inflation is rising and the Federal Reserve, which kept a very easy policy in place for far too long, is playing catchup and contributing to investor angst.
Besides the Fed and inflation, investors are worried about the possibility of a recession, geopolitical tremors in Ukraine, and draconian Covid lockdowns in China, which have aggravated supply chain issues.
Many potential outcomes have fueled volatility.
Taking the stairs up and the elevator down
Market weakness can be unnerving. But let’s look at some encouraging long-term data.
The Schwab Center for Financial Research reviewed S&P 500 data going back to 1966. While we know that past performance doesn’t guarantee future results, the Schwab found that the average bear market lasted 446 days (including weekends/holidays), with an average decline of 38.4%. Bull markets, however, averaged 2,069 days and returned an average of 209.2%.
Nonetheless, we have not officially entered a bear market, defined as a 20% peak-to-trough decline in the S&P 500 Index. If we do, its start would date back to January 3.
From its closing peak of 4,796.56 on January 3, the S&P 500’s most recent closing bottom of 3,900.79 on May 19 translates into a peak-to-trough loss of 18.68% (St. Louis Federal Reserve).
Yet, market timing is exceedingly difficult. As one financial journalist once commented, “The market timer's Hall of Fame is an empty room.”
Put another way, “I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two,” legendary investor Warren Buffett said.
Buffett has an investment plan that he follows. Your investment plan is designed to take unexpected detours into account, but it isn’t set in stone.
As life’s circumstances change, the plan can be revisited. However, as the plan discourages one from taking on too much risk when stocks are soaring, it also discourages one from selling when the waters turn choppy.
If you have any questions or concerns, please don’t hesitate to let me know.
Two for the Road
Since 1946, stock market declines of 10-20% have happened 29 times, 20%-40% nine times, and 40% or more three times. Two takeaways: First, most stock market pullbacks above 20% have been associated with recessions (there have been 12 since 1946). Second, for long-term investors, severe pullbacks of 20%-40% are rare or don’t last very long – only 14 months. - CNBC, January 25, 2022
A fellow in Moscow bought a new car. The dealer said, "Congratulations. Come back 10 years from today and you can get your car." The man asked, "When should I come back? In the morning or the afternoon?" The dealer was puzzled. "After 10 years, what difference does it make when you come in?" The man said, "Because the plumber is coming in the morning." -Ronald Reagan Click here to watch President Reagan deliver this joke
This commentary reflects the personal opinions, viewpoints and analyses of the Stordahl Capital Management, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Stordahl Capital Management, Inc. or performance returns of any Stordahl Capital Management, Inc. Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this piece constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Accessing websites through links directs you away from our website. Stordahl Capital Management is not responsible for errors or omissions in the material on third party websites and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from the use of those websites. Please note that trading instructions through email, fax or voicemail will not be taken. Your identity and timely retrieval of instructions cannot be guaranteed. Stordahl Capital Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
1. The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
2. The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly. Past performance does not guarantee future results.
3. The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
4. The Global Dow is an unmanaged index composed of stocks of 150 top companies. It cannot be invested into directly. Past performance does not guarantee future results.
5. CME Group front-month contract; Prices can and do vary; past performance does not guarantee future results.
6. CME Group continuous contract; Prices can and do vary; past performance does not guarantee future results.