The last time I shared my thoughts on the market and economy with you was on July 5, 2021. It is funny how a lot has happened since then, but the main stories are the same. In July, I highlighted two things: (1) potential for rising inflation (2) a heated market.
Since the time of that writing, we have begun to experience higher inflation. As you may have read or heard, inflation is currently rising at an annualized rate of 6%. Some areas of inflation, such as gas and meats, are much higher. And if the market was heated back in July, it is even more so now. The stock market (S&P 500) is up 9% since July.
INFLATION: While opinions are very strong, the jury is still out on how prolonged this increase of inflation will be, and how much higher it will go. The current rate of inflation makes bonds very unattractive – in fact, after accounting for inflation, bonds have a negative yield. So why own bonds or hold cash? Thus, we have been moving clients to bond alternatives over the last few years.
HEATED MARKET: The stock market has produced significant wealth for us over the past decade, despite the pandemic and Corona Crash. Market pundits and “experts” have been saying for years that we are due for a pull back. While we may be “due”, no one knows nor can predict when that would happen. Just imagine if at the end of last year, you decided that the bounce back from the Corona Crash was so swift, that the market was bound to sell off as the pandemic wore on and decided to sell your stock investments. You would have missed out on the 20% increase this year! The greatest lesson I have learned in the past 22 years is that the market doesn’t follow what we believe is reasonable. A ton of money has been “lost” by investors being certain of things and then missing out on gains. Almost all of my clients have followed their plan and been rewarded handsomely for their patience and discipline. Kudos to you!
But after the current gains and even more heated market, with inflation surging…now is the time to get out, right? No. We don’t get out because we are long-term investors, not gamblers betting on the next market move, no matter how strong our hunch is. Whether the market goes up or down in the future is somewhat irrelevant to our decisions today because we can’t predict it. It is a fool’s game to try to predict and time the market. We know for a fact the market will go down at some point and we know as a fact the market will recover. We just don’t know what will happen in between or how long it will last.
Stocks are one of the best ways to fight inflation. And while the market may be “high”, that does not mean it is bound to go lower. The “high” market is supported by strong earnings and a lot of cash and bonds on the sidelines. That is right, despite the incredible run stocks have had over the past decade, we still have a lot of money in cash and bonds – ready to be deployed. Perhaps some of that cash was from investors who were certain the market was too high before and cashed out.
Now, there may come a time in the future when we reduce stock exposure– just like we increased our stock exposure when the Corona Crash occurred. But those are tactical adjustments as we balance risk and reward. At no time do I ever claim to know what will happen in the market, but sometimes adjustments are appropriate based on risk/reward and your individual situation. Making such adjustments could be justified if we get a strong surge in stock prices into the end of the year (melt-up)by reducing equity and re-allocating some money to our safety buckets. Thus, taking some of our gains and selling high.
LOOKING FORWARD: The market will go down at some point, and it may go down 15% - 20%. It might be in 1 month, 1yr or we could have another 10-year run before a big drawdown. However, it will go down at some future point. When that happens, the headlines will be negative, and fear will permeate. Every correction is like that. When (not if) the market goes down substantially, we will do the same thing we did during the Corona Crash – we will buy quality stocks at good (buying low) prices, be patient, and maintain discipline to our long-term plan. The best investment advice has always been to buy low, sell high. That is exactly what we plan to do with our rebalance process.
