ASK BART: Should I Fear A Bear Market? (Part I)
The following is Part I of a new series dedicated to answering real client questions. The questions themselves, along with names and details, have been altered to protect the innocent.
READING TIME: 35 minutes
Question: The markets have been volatile the last few months and my portfolio is down quite a bit this year. It feels like the world is spinning out of control and taking the market along with it. With inflation, interest rates and war raging, what does your crystal ball portend for the rest of 2022? How do you plan to protect my investments in the event of a market correction or worse?
Answer: That's a good and fair question, and one it seems like I'm fielding on an almost-hourly basis these days. After last Friday's market sell-off and a very rough start to this week, I anticipate that call and email volumes may only increase from here.
My spidey-senses are telling me that we may be entering what economists term the 'capitulation" phase of the market cycle, where even experienced and patient investors start to get a little nervous and crack. It's definitely not lost on me how few investors are calling in these days with the same level of enthusiasm as a year ago. When I have the privilege of taking those calls, I always make a genuine and concerted effort to assure clients that I'm certainly not oblivious to the deteriorating economic conditions nor the absolute dearth of virtually anything resembling positive news to cling onto right now.
Bad data excites me because a.) I'm lonely, b.) I've been waiting for almost a full decade for the market to get cheaper (it's only dropped double-digits on 3-4 occasions since 2009, c.) I've seen this movie before a few times and I know how it ends. But I understand that's rarely the case for normal people and I'm extraordinarily empathetic to everyone watching their past gains disappearing on paper. After being up more than 22% in late 2021, the S&P 500's 12-month performance went negative yesterday, representing quite a fall from grace for many of America's best companies.
I would have thought Google, Microsoft and Amazon stock being down more than 25% from their 2021 peaks would be cause for celebration- and would have been if I had suggested it even just this past December. Hell, Facebook is down more than 50% and Netflix 70%. But humans are an odd species, and I guess a lot of them don't believe these tiny companies will survive the recession. Not sure which of their business lines is going to disappear anytime soon.
It helps that I have this nifty little brochure sitting on my desk each morning and tattooed on my cold, black heart.
Yeah, you should probably buckle up and take three breaths, this blog post is gonna be one of those. If you were born after 1980, this is your official trigger warning.
While my unscientific survey confirms that few if any of my clients are missing meals or going to bed at night without a roof over their heads (my personal litmus test for my own first-world problems + gratitude), by modern-standards this slow, painful "grinding" market drop feels existential... literally gut-wrenching. When investors witness years of consistent saving or a large chunk of money earned or received suddenly evaporate on their statements and smartphone apps, it's not surprising that brains can begin to short-circuit from a combined recognition of both a.) our current lack of control over the situation and b.) "all the better things I could have done with that money instead." In short, regret creeps in and overwhelms us. For some, it haunts us and we will stupid. We rotate between blaming our financial advisors, ourselves and bad luck... never a healthy mindset.
While I'm no social psychologist, I have played one in my office for many years, and I have observed one commonality above all others: while we - especially men - likes to believe that we're in control of most aspects of their lives most of the time, that is an illusion. And when that illusion is shattered, the cognitive dissonance we experience feels like a genuine and painful gut-punch to our nervous system. When it involves money that we believe we 'can't afford to lose,' then the impact and emotion can become especially acute. The fact that bear markets happen so rarely (usually about once every 7-8 years) seems to me to be both a blessing and a curse. I doubt any American living during any time period since the founding of the country has ever felt less certainty than those that preceded them, because life in the West always seems to just get better. Whom among us would trade their livelihood today in xschange for toiling in the fields during the agricultural revolution or the factories of the industrial revolution?
No thanks! I work indoors and have soft hands, and like central air conditioning too much!
One of the most consistent characteristics of capitalism and the free market- the two systems that have produced the most success for mankind in the last few generations - is that America always finds a way out and a way forward, improving the lives of the majority of its citizens in the process. This improvement has never never evenly spread across all demographics, but every demographic is better off than their peers in other countries, including and especially their former country. And that's because America itself is better than any other country, has been since it's founding and will be until its demise. And it so only because of a few important documents created 300-odd years ago.
I know this because I am writing this- and you are reading it- in America, and we are both intelligent and logical people. We could both be doing these activities anywhere else on the planet (thanks to the Americans that preceded us) but we're not. We're not on Mars, we're not in Cost Rica, and we're not in New Zealand- all places that are inferior to America, and not by a little bit. I know this because none of these countries have 200,000 foreigners lined up on the border each month waiting for their free, unvaccinated entry into the park. Last I checked, there's only one country in the world with level of popularity (and this porous a border), and we won the geographic lottery being born into it.
Let's play 'guess this border.' I bet you will guess correctly!
I recognize that my patriotism sometimes hurts people's feeling, and I want them to know that I am deeply, deeply concerned about that. But when you travel overseas 3-4 times a year- and have throughout the pandemic- I feel it gives you some leverage in this debate. Every day I wake up and don't want to catch a C-130 out of town, I feel like this is definitely the place to be.
Insane. Don’t have any other words.— Ragıp Soylu (@ragipsoylu) August 16, 2021
The Kabul Airport.
You thought this was a commentary about the stock market. Hang in there. It's only Round 1 and I'm just softening you up.
WE DON'T KNOW WHAT WE DON'T KNOW
One of the most reliable axioms of growing older and (hopefully) maturing is the enhanced realization of how little we actually know. (Or said differently, "how much we don't know that we don't know.") Anyone unfamiliar with this concept probably lacks the age or experience to have yet learned it the hard way, but I believe that humbling bell of enlightenment tolls for us all eventually.
The realization of how little we have control over can often be a traumatic experience. Many people become angry, while others suffer paralysis. I've also witnessed some people go a little bit crazy, like running out and hoarding toilet paper or pumping fuel into Ziploc bags. History usually laughs at these folks but in moments of maximum hysteria, we're indeed a strange and ponderous species. Similarly, many investors experiencing extraordinary declines in market prices can enter a state vacillating somewhere between depression and despondency. It's rare for me to meet with more than a very few odd souls in any market selloff who become energized by the thought that forces more powerful than themselves and exert far more influence can and usually will uncover new opportunities in their wake for those who remain enlightened, patient and prepared.
The truth is that absolute control is largely a delusion - more akin to fantasy and a symptom of our present era of techno-narcissism, hyper-convenience, mass affluence and luxury. In my experience- both personally and professionally- conditioning that continually reminds us that we are not in control can serve as an empowering influence when times get really tough. Accepting that we are not in control, that it's okay and that things tend to workout in our favor in the end are all useful mindsets that carry enormous benefit for the modern investor. Unfortunately, that's not the world we live in, as our present reality contains plenty of actors and entities jockeying to assure us that we are in control when we're most-assuredly not.
Many corporations, organizations and government agencies seem quite invested in convincing us that we are our own gods, that we fully control our environment, and that our present and future fates are uniquely stable, prosperous and reliable utopias. If that veil of illusion is pierced or shattered, these powerful groups risk losing their ability to achieve their objectives and agendas (a subject well beyond the scope of this post, as well as some of my client's ideological comfort zones!) Suffice to say that an agitated, overstressed and uncertain population consumes less, cooperates less and obeys less. It would be enough for us to simply agree that there's an almost universally-vested interest at the highest levels of our society to assuage and numb us all into a dull sense of complacency and maintenance of the status quo to keep the majority of people comfortably docile. (Admittedly, the business model of modern media certainly does foment chaos and outrage for profit, but I find they generally prefer an outcome of confusion and paralysis over overt action.)
Against that backdrop, it is absolutely understandable that when the financial markets gyrate, all but the most experienced, strict and loyal acolytes of free market capitalism can easily become both shaken and stirred. And 2022 has no shortage of ingredients for this bitter cocktail. We would be best served remembering that this is a feature of our current economic system, not a glitch. Still, it's hard not to notice how weird everything has gotten, and how quickly...
It's sometimes easy to become complacent and cynical towards the almost inconceivable levels of graft and dysfunction in our current political environment- in which one party is insane and the other party is even insaner. While I've only been alive since the 70's, I can attest that I've never observed a greater collection of corrupt and inept clowns than this current class of representatives in the executive and legislative branches. They constantly tell us with a straight face that the sky is purple (or falling), up is down and we didn't hear what we just thought we heard. They whine, sputter, blame and obfuscate like it's in the job description. And each new day brings rhetoric so brazen and spurious you can't help but laugh. Or maybe that's just me.
When not fundraising, Congressmen seem to spend most of their productive hours and energy simply attacking each other on social media, that is when they're not introducing more and more utter lunacy into the modern zeitgeist. As an example, just last month in response to the Russian invasion of Ukraine, our Congress deemed it critical at that exact moment to push through an anti-lynching bill. Yes, with tanks crossing over borders and a very real risk of WW III on the horizon, and with at least 312 easily more important issues weighing on Americans' minds, Congress' determined the focus should be the massive scourge of lynching presently terrorizing the homeland.
I am sure I am not the only one relieved that, in addition to murder with a rope being categorized as both a crime AND a hate-crime (is a hateful murder actually worse than a random one?), lynching now carries an additional third layer of punishment. The details of the bill are so absurd that even NPR's ridiculous take reads like something out of the The Onion. For a bill that will surely provide plenty of forensics data for future historians to marvel at, a crime that we haven't seen in my lifetime somehow became the top political accomplishment of our 117th US Congress. It leaves all but the mentally-disabled scratching their heads and wondering where are all the adults, and whether perhaps the legislative branch is still really necessary. Would we all be better off with McDonald's kiosks installed at each desk in the Capitol reprogrammed to represent each gerrymandered district running purely off algorithms based on the Constitution? And did I just invent the greatest political innovation since the ballot box? Of course, it also has me pondering whether our elected representative have personal concerns about the return of the practice, do perhaps know something we don't? I guess that's a conversation for another day.
I could continue to riff but honestly a.) I think you get the point and b.) Congress has accomplished so little in 2022 that I'm all out of quips. They've transcended humor and satire, kinda' like Saturday Night Live. But it's only April, so I'm hopeful.
In addition to government, we now see large corporations (the second of the three original stabilizing pillars of our society - with the church being the third) starting to fall off the rails of reality as well. The year started off with Americans digesting Facebook (who now self-identifies by the new name, "Meta") actually state out loud their professed intention of transitioning as many human beings as possible into digital avatars in their Metaverse. Given our fatal levels of online addiction and obesity, I would have predicted a greater backlash to such a disturbing plan. How is this company still in business again? Their scheme has also forced society to answer the age-old question of what could go wrong with letting Mark Zuckerberg, who spent over $400M in the last presidential election, serve as it's ruler. I've struggled with girls my entire life, but even I'm not as creepy as this dude. The response to this galactic hubris - at least from the market- has thus far been swift and harsh, cutting the company's market valuation almost in half in four months. You think you've lost money!... Imagine if you were down ~ 50% since Christmas!
Not to be outdone, Twitter, the internet's new town square, observed Facebook's folly and said, "Hold my beer and watch this..." The company, who's stock was already trading at -25% below its 2013 IPO price, just last week attempted it's own version of corporate suicide within their leadership and employee ranks following the news that Elon Musk was buying the company to rein in some of their increasingly nonsensical censorship policies. An internal revolt is ensuing, presumably based on the genuine fear of becoming the world's first Big Tech company run by an African-American, a baffling response from a political demographic that traditionally promotes diversity and inclusion as one of it's most cherished tenants. The silence from other African-Americans is deafening.
While I'm enthusiastically non-political, I and many millions of other spectators to the most recent Twitter drama still find it infinitely surreal that Twitter's board reacted to Musk's offer- which would increase shareholder value by almost 30% overnight- by enacting a 'poison pill' maneuver that would wound or possibly destroy the company- as well as millions of shareholder's and thousands of employees they've sworn to serve- all to prevent their internal censorship policies from coming to light. Sounds like a case for that infallible investigator who leaves no rock unturned, Robert Mueller! What's even more bizarre is that the possibility of free speech returning to the platform quickly reversed their own stock-price-tailspin and has so far anointed Twitter as the best-performing Big Tech stock of 2022 (see dark blue line below). Yet apparently the inability to censor the dissenting opinions that makes so many snowflake tummy's hurt is now being framed as the end of the republic. As for me, I think they are going to survive.
And you thought you were down a lot in 2021! ^^^
By now, most investors are familiar with Disney's inexplicable and disastrous foray into local politics to support Florida's Parental Rights in Education bill (better known as the 'Don't Say Gay Bill" or "Anti-Grooming Bill" depending on your political ideology and IQ), a measure introduced by state legislators which aims to forbid teacher instruction on sexual orientation and gender identity for students in kindergarten through third grade.
Even I have enough sense to avoid touching this debate with a ten-foot pole, and I'm borderline illiterate. Disney's decision to not only weigh in on- but actually help organize - a movement in direct opposition to a majority of Florida voters- especially on a topic as unpopular with the parents of their largest customer base, has thus far only served to inspire similar and merciless punishment from Wall Street (with Disney down -25% YTD below). It's important to pause and appreciate that Disney's attempt to subvert their fellow Floridians is a scenario that would have been considered inconceivable just a few years ago. Further, progressive Americans- usually staunch opponents of big business and loyal proponents of both democracy and higher taxes (especially corporate)- are now up in arms over Florida's revocation of Disney's special status allowing them to act as their own separate country while dodging millions of dollars in state and local taxes. What planet am I on?
The entire affair, along with those mentioned above, has consumers as well as investors feeling powerless to levels and breadth of incompetence that is hard to fathom, leaving many to wonder, "If the people running America's best companies are this ineffectual, and so willing to harm their customers, employees and shareholders, then what other disasters could they cause next?" To many, these acting against the interests of one's own supporters feels like a betrayal from organizations who's sole purpose in a capitalistic economy should be to represent and protect the interests of shareholders. But we've now entered a new and modern twilight zone of corporate activism that has a lot of Americans disoriented and agitated (not the word I would normally use!)
Up until this past fall, the Federal Reserve, led by Chairman Jerome Powell and arguably the single entity with the broadest perspective on the US economy- was still claiming that inflation was 'transitory' (i.e. temporary) despite all evidence to the contrary and even as cost of living continued to rise month after month in virtually every aspect of society- from groceries to fuel to housing. Everyone could see it everywhere, except apparently the Fed. Then suddenly during public testimony in November, Powell chose to back away from those original assertions and even asked the world to forget that he ever said the word in the first place. Man, what I wouldn't give to have the power to wave a wand and wish away all of the dumb things I've said in the past!
Now the Fed has apparently discovered what everyone else has already known since we all cashed those stimmy checks in 2020: that inflation has proved to be more stubborn than originally thought. Apparently, if you double the money supply in a single year without a commiserate increase in productivity or population, some kooky things can happen. After a .25 raise in the Fed Funds rate earlier this month (a monetary tool that influences virtually every other rate of borrowing and lending in the world), most economists now anticipate another .50 raise in May, followed by another in .50 in June. Those are large leaps for such a short period of time and they communicate a significant about-face in outlook from just a few months ago.
It's my expectation that we could- and probably will- see mortgage rates rise over 7% before the end of this year- a far cry from the sub-3% rates we enjoyed just a few months ago. This will act as a massive headwind for many household budgets that are already strained from government-induced inflation and government-induced oil supply constraints. With consumption representing over 70% America's Gross Domestic Product (GDP), and the vast majority of American households already living paycheck-to-paycheck, Americans would be forgiven for wondering why our current leaders would intentionally hurt every American's finances by facilitating higher prices that they surely must have known would follow their expansion of the money supply and shrinking of the fossil fuel sector. Families must be experiencing similar bewilderment seeing no relief and no plan in sight to prevent - or at least help mitigate - additional financial pain in the rapidly-approaching run up to the November mid-term elections, a period that may result in great hardship for many if they have to liquidate assets to cover short-term emergencies brought on by higher costs of living.
I recognize that we could have included the Federal Reserve under the government section above and made some fun jokes at their expense. But the truth is that unbeknownst to a lot of people, the Federal Reserve is not a federal agency, they have simply given themselves a similar name and pretend that they are one. In reality, they are the head of a cabal of the financial services industry, their employees frequently rotate between them, the US Treasury department and Wall Street, and their daily behavior is all-private sector. They've steered this country's finances for just over 100 years, but they seem to have painted themselves into another corner that will lead to some economic volatility and stress before we can move forward.
Regardless, it's simply worth noting that the Fed employs some of the top financial minds in the world, with the most and best information about the current and future state of our country, and yet still have no greater insight into either than my own mother. To be fair, my mom is wicked-smart and I trust her financial acumen and intentions far more than a bunch of unelected bureaucrats who shill for Goldman Sachs and Wells Fargo. My point is only that their capacity and perspective has been and continues to be, shall we say, lacking. While it leaves open a lot of enticing opportunity for long-term investors, it's going to create a lot of stress for others with too many liabilities and too few assets.
With all this doom and gloom, right now you're probably thinking about jumping off of a bridge, as soon as you call me tomorrow morning insisting that we move to cash. But my professional advise is to stop. Breathe. And not do that. (You can call me, I would love that. Just reconsider the other two actions.)
The truth is that things are likely to get much better. I won't deny that the general feeling of unease across the population (and my clientele) right now seems palpable and justified. We have children running our country, our corporations and many of our most powerful institutions. However, that's pretty much par for the course for the entire history of our country. It's why the Founding Fathers designed America the way they did, by introducing a Federalist system that would protect the people from themselves and each other. States like Texas, Tennessee and Florida would zig when Illinois, New York and California zagged, and U-Haul would ultimately decide the winner. We would all laugh at the losers, America would occasionally and sometimes awkwardly drift back-and-forth as it found it's new bearing. And then one day, we would wake up from our self-induced stupor, pivot back to some sense of normalcy and commence kicking ass like we always do.
"California remained the top state for out-migration [in 2021], but its net loss of U-Haul trucks wasn’t as severe as in 2020. That can be partially attributed to the fact that U-Haul simply ran out of inventory to meet customer demand for outbound equipment [in California].."
- U-Haul Growth Index
It's my conviction that America was quite literally designed for environments such as this, experiencing all natural and healthy consequences of a republic and a free market. Our unique system absorbs tragically flawed actors making poor and sometimes deleterious decisions. America is a unicorn that eats trash and poops out rainbow gumdrops. The stock market is simply the financial subsidiary of a much larger machine called capitalism that thrives on change and creative destruction, occasionally exploits the madness of crowds and redistributes wealth every few years to those with
Bart a reliable toolbox of beneficial characteristics, including (but not limited to) intellect, historical context, past experience, patience, courage, optimism, long-term orientation and money. Lots and lots of money. Because if you've been successful at accumulating a reasonable amount of wealth throughout your life, you've probably seen this movie before. You know where we are and where we're headed. What you don't know- what NO ONE knows - is the timing. That's where most investors get crossed up and antsy. That's what we're going to discuss next.
The truth is that market corrections are hardly something to fear or avoid, they should instead be enthusiastically embraced as a rare gift "designed to redistribute wealth from one group of investors to another." Chaos, fear and change can all be good if wielded appropriately. The truth is that my primary objective is not specifically to shield clients from market corrections, it's to do everything in my power to ensure they're in the right group.
Of course, now is an excellent time to mention that past performance is no guarantee of future returns and you should always ask your financial advisor if [following time-tested financial principles] is right for you.