Some Reassurance For Volatile Times
The capital markets are once again experiencing a bout of high volatility. Both stock and bond returns are negative year-to-date, with technology and other growth stocks leading the pack. Possibly investors are worried about the outcome of the Russian invasion of Ukraine. Or the longer-term likelihood of protracted inflation. Or interest rate increases. Or something else. The question you might be asking yourself when times are unsettling: “Is something different this time?”
From my perspective nothing has fundamentally changed. Growth stocks had outperformed value stocks over the last decade although long term the reverse had been true. Numerous researchers surmise that it was primarily low interest rates that enabled the growth anomaly. Now that rates are rising, they suggest that value stocks could turn around and outperform growth (which in fact they have been doing since the beginning of this year). On the fixed income side, most bond funds have declined in value due to the Fed raising interest rates so quickly in order to try to smother inflation. But fixed income growth predominantly comes from bond interest, not capital gains or losses. We would expect bond funds to turn around sometime in the near future with higher returns than before, depending on inflation and consequent Fed action.
Of course, nobody can predict the future. But there’s nothing happening now that suggests any structural shift in the U.S. or in global economies other than shortages due to war and supply chain disruptions which will smooth themselves out over time. Even inflation, which is headline news right now, is not having anywhere near the kind of impact on the economy that it did in the 1980s. In short, we’re simply going through a period of market uncertainty caused by numerous events.
At the end of 1921 the total combined earnings and dividends of the largest U.S. corporations was $0.75 per share. One hundred years later it had grown to $258.27. This is why we invest in the stock market. Every investor gets to share in that growth. The path over that century was obviously far from smooth. But with positive returns in two out of every three years, stocks represent a well-established investment asset class that is hard to beat long-term.
I also want to remind everyone that your financial success is based not on the size of your investment portfolio at any moment in time but rather on the degree to which that portfolio, over time, will support all the future goals in your financial plan. Remember also that downturns provide buying opportunities. Stock prices worldwide are now cheaper than they were before. New savings can be used to purchase shares at lower prices. Current savings can be reallocated to lower-cost higher-growth assets. Either approach should result in improved returns in the future.
What should you do during times like these? Monitor your portfolio regularly for both buying and tax-loss harvesting opportunities. Keep your eyes open for new investment opportunities that have the potential to reduce volatility without giving up too much growth when things improve. And most of all try not to worry. The markets will come back at some point.