There is no shortage of cliches when it comes to talking about financial markets. But the thing about cliches is, they usually are true! Take for example, “The only thing about markets that is predictable is that they are unpredictable.”
Very often the market’s response to events that grab headlines and garner screen time with talking heads on TV is different than what most people expect. Take this year for example, we’ve trudged through a potential banking crisis, a near default on Treasuries and subsequent rating downgrades, the threat of a government shutdown, high interest rates, conflict in the Middle East, an ever-looming recession, and an election around the corner. Any one of those on its own, let alone all happening within 7 months, would lead many to believe the market would easily be down double-digits, yet stocks are positive in 2023.
While interest rates may not have peaked just yet, there is consensus in the industry that we are close. On October 20th, the Fed Chairman, Jerome Powell, indicated the Fed may leave rates unchanged in November, but left the door open for a rate hike in December. There is also mounting evidence indicating the Fed is accomplishing its goal of getting inflation under control, but since economic activity has remained fairly robust the Fed is likely to keep rates elevated until they start to see signs the economy is cooling. Once the data suggests they’ve tightened conditions enough the expected course of action is for them to begin reducing interest rates. In such an environment, bond portfolios will have the wind at their back and be positioned to capture strong returns.
Of course, risks abound, and any myriad of things could threaten the so-called ‘soft-landing’ to which the media likes to hold Fed Chairman Jay Powell accountable. Clients often share with us their feelings and concerns about the current state of global affairs and economic conditions. Commonly, the sentiment seems dire. That’s because an endless stream of negative, unsettling, and polarizing content flows through news outlets, across devices, and in publications. It’s seemingly unavoidable, so, naturally, it is going to taint one’s view of how things are going. You begin to think, “It’s been bad before, but ‘it’s different this time;’ it’s much worse.”
During the recession of 1954, famed investor, Sir John Templeton, wrote to clients, “The four most dangerous words in investing are: ‘This time it’s different.'” What did he mean by this? In times of uncertainty or volatility, people tend to use this rationale to justify emotion-driven decisions. And when we react with emotion in making financial decisions, it often proves costly. We put our financial health in jeopardy. The set of circumstances we face today is different. But clearly, human nature has not changed much in 70 years. As another investing giant, and Warren Buffett’s mentor, Benjamin Graham, once observed, “The investor’s chief problem — and even his worst enemy — is likely to be himself.”
So, what are we to do? It helps to limit screen time and tune out the noise. Focus on productive pursuits that bring you joy. Understand that we are constantly presented with new and different challenges that human ingenuity will find ways to address and overcome and realize that the companies that comprise your portfolio will always be looking to maximize returns for their shareholders no matter the circumstances. This is how the S&P 500 has delivered an average annual return of 10.1% since 1926.
Of course, these returns don’t come linearly. They fluctuate all over the place. But if we learn to expect the unexpected from markets, and remain disciplined and diversified, then the probability of our long-term investment success becomes a lot more predictable.