Off to a Rough Start
After strong stock market returns in 2020 and 2021, it’s not terribly surprising to see the market struggling this year. That said, the reasons for the struggle are at least somewhat surprising: major inflation fears and the Russian invasion of Ukraine. The expectation ending 2021 was that these elements would be ‘manageable’ but now both appear to be much bigger problems than initially expected.
At least in the short run, expectations (and the exceeding and coming up short of) drive the stock market. It appears the current market expectation is of harder days to come and thus stock prices have fallen. It’s somewhat ironic, yet fitting, that stock prices deflate as prices elsewhere in the economy inflate.
No one (repeat: no one) knows exactly how things will play out from here as the short term moves of the markets are highly unpredictable. That’s okay. The reliable rewards of the stock market are gained over longer periods of time and the money one places in the stock market should be long-term focused. Otherwise, it’s too easy to get derailed by short-term thinking and reactions to market moves and myopic perspectives.
Investing is a Relationship
The more I practice as an investment advisor, the more I realized that there are many similarities between investing and relationships. I think it’s ultimately because when you own stocks you buy (and hold) them for both practical and emotional reasons.
Some investors buy stocks for short-term gains and are quick to move on if those gains don’t materialize. Others make their investment choices and stick with them for a long time, sometimes for better, sometimes for worse.
Of course, as I often mention, the long-term benefits of the stock market are much more reliable than the short-term benefits. That said, it doesn’t mean that you should own all your stocks for the long-term. Sometimes, similar to relationships, certain investments don’t work out and the reasons you decided to buy a stock don’t hold up with time and you have to decide to either stay patient, hoping for better, or determine that circumstance have changed and you need to move on to what you believe will be a better investment elsewhere.
You have to balance patience without stubbornness and need to pay attention to ALL the facts, good and bad. Some things do get better with time and other things do not. It’s wise to stay aware of this fact and be very honest with yourself with the information at hand to make sure the investments you hold make sense and resonate with you, both when purchased and over time.
For example, if you own Pfizer and read that their vaccine is less effective than first thought, you might sell the stock if you’re in Pfizer for the short run. However, if you are committed to Pfizer as a good investment longer term with many compelling products and a strong future pipeline, then short-term ‘bad’ news shouldn’t impact your thinking and plans. As with relationships, if you have a strong commitment, you can comfortably overcome an issue or problem; if not, it wouldn’t take much to derail things.
A Black Swan Just Flew In….
Last quarter I commented on the need to factor in occasional black swans (unpredictable, large, often negative events) to one’s investment strategy.
It didn’t take long for one to swoop in and upset an already-nervous market. Though the Russian/Ukrainian tensions have been building for a while, there was a general sense that things would likely be effectively negotiated or be a short-term and contained conflict. Those assumptions didn’t pan out. Not only has the conflict been more bloody and protracted than most expected, but it also gives rise to the notion that Putin might not stop his aggressions at just one country.
Markets do NOT like uncertainty, especially of this magnitude. Add the concerns of inflation and Fed tightening and it’s easy to see why investors now see the glass as at least half empty.
Inflation was last a major problem for Americans back in the late seventies – long enough ago that many people have either mostly forgotten about it or didn’t live through it. Instead, in recent years DEflation seemed the larger concern.
So why has inflation returned with such a fury? It’s never 100% clear, but here’s my best educated guess: when Covid hit our economy in unprecedented ways (lockdowns, etc..) collective reactions culminated in notable inflation. Those reactions include our government injecting the economy with stunning amounts of cash to businesses through the PPP program, individuals in the form of stimulus checks and states and cities through infrastructure spending. Further, workers quit or saw their jobs vanish, reducing our work force. Pent up demand for things like travel, home improvements and the like goosed demand at the same time labor and parts supply were constrained….resulting in a perfect storm.
The Stock Market’s Price of Admission
Investors now must reacquaint themselves with the ‘other’ side of the investing coin: falling stock prices. The human mindset is not wired well for this. When markets rise, most everyone is happy with their investments and spirits are high. When markets fall, investors start to feel relatively poor and use the concept of ‘framing’ to feel that they’ve lost money, even if it’s temporary and even if it’s only from their highest level of wealth.
I call these tough periods in the market the ‘cost of admission’ to being in the stock market. If there weren’t down markets, everyone would put all their money in it as an apparent risk-free investment.
Everyone likes the stock market when it’s going up. The key is to be okay with it while it’s going down. Otherwise, you’ll almost assuredly buy high (when the market’s up) and sell low.
Down stock markets test one’s character and approach to investing – can you walk the talk or when the going gets tough do you get scared and freeze?
I’ve found that many of my best investments were when I bought good companies during a bad market. I had a sense of both dread and cautious optimism when buying at those times. If everyone loves an investment, the price will naturally get too high and at some point the bubble will burst (see Zoom and Peloton, etc). On the other hand, if there’s little enthusiasm for a stock, the price naturally falls. If you can invest in a good company going through a shorter-term challenge (as opposed to a long-term decline), you will benefit over time.
Brian Weisman, CFA,CPA,CFP,CMA