Navigating Turbulent Markets
Updated: Feb 3
The level of volatility we have been experiencing in the market has only happened twice in the last 30 years. The S&P 500 Index and the NASDAQ are down 21% and 30% year-to-date. There are multiple macro-economic headwinds that we face such as the Russian invasion of Ukraine, inflation running amok, and the Federal Reserve’s decision to start raising interest rates (a policy environment that most young investors have never faced before). To top it all off, Covid-19 variants continue to inject uncertainty into the job market and supply chains across the world.
Should we be worried about all these horrible things?
I can’t tell you not to be worried, but what I can do is show you two principles we focus on when dealing with volatility.
1) Our investment decisions are focused on the business, NOT the share price. All the companies we invest in possess:
i) Pricing Power – to help offset inflation
ii) Strong Balance Sheets – to weather any economic downturn
iii) Growth Prospects – to help recover from downturns quickly
2) We believe in the long-term staying power of the American economic machine. Based on our 100 Year History of Bear Markets Report, the American economy not only recovered but came back stronger after every major catastrophe.
What does history tell us?
Are you worried about the Russian invasion of Ukraine? My home country, Hungary was invaded by the Soviet Union in 1956. The market declined 22% over 8 months, before recovering in less than a year!
Are you worried about rising interest rates from 0% to maybe 1% by the end of the year? In 1980, the Federal Reserve increased rates from 11.2% to 20% (no that is not a typo). The market dropped 27%, but just 1 year later was up 66%. The list of horrific events goes on and on, but one thing remained constant throughout history: the staying power of the American people and the American economy.
Here are a couple useful graphs and datapoints to keep in mind:
1, In times of crisis, don’t lose the forest for the trees. The market has demonstrated resilience for over 90 years, turning a $1,000 investment into $7.6 million of wealth if you stayed fully invested during that entire time.
2, Bear markets and horrific events happen year after year, but the stock market has continuously found a way to recover from them and subsequently set new highs.
3, We believe time in the market, beats trying to time the market. When it comes to investing, it pays to be resilient.
4, The market on average declined by 14% from top to bottom each year in the last 4 decades. Those who stayed resilient during the intra-year declines, were rewarded with a 12.3% annualized return.
5, Companies do quite well even during periods of rising interest rates.
6, Most of your returns in the stock market will come from the 1st year of the next bull market. Are you willing to time that?
7, Don’t follow the crowd or the headlines. Neither of those care about you. When everybody panics the most, it is safe to assume that all the panic has already been “used up”, and the market is about to turn. Remember the market turns before the economy does, and you make most of your money in the 1st year of the next bull market.