Don’t Panic – The Future is Looking Brighter! … but the present looks very bleak!
“If you’re going through hell, keep going.” - Winston Churchill
What the Future looks like:
Every Bear Market has been followed by a Bull Market, and
Every Recession has been followed by a period of economic expansion.
It’s crucial to look at the present with a perspective of the past.
Bear Markets and Bull Markets – Since 1945 (Source: Yardeni Research, Inc.)
• 13 Bear Markets. (Including the one we are presently in.)
Average % loss: (33%)
Average duration of the Bear Market: 364 days (1 Year).
• 12 Bull Markets.
Average % gain: 178%
Average duration of the Bull Market: 1905 days (5.2 Years).
“Nearly 50% of the S&P 500’s strongest days in the last 20 years occurred during a Bear market.”
“Another 34% of the market’s best days took place in the first two months of a Bull market – before it
was clear a Bull market had begun.” (Source: Ned Davis Research)
“You make most of your money in a Bear market; you just don’t realize it at the time.” -Shelby Davis (Famed Value Investor)
Click here for a great visual illustration of the history of Bear Markets, Bull Markets and Recessions and how
they are all a normal part of the US economy.
A “Bear Market” is defined as a decline in the market by at least 20% from its most recent high and over a
period of at least 2 months.
• The S&P500 officially went into Bear Market territory on June 13th of this year when it declined over
20% from its high on January 3rd and closed down over 21% as of June 30.
• The Nasdaq100 is down nearly 30% and
• The long-term US Treasury Bond market (TLT – iShares Barclays 20+ Year Treasury ETF) is down 23%
for the year.
Recessions and Expansions - Since 1945
According to the National Bureau of Economic Research, there have been
• 12 Recessions lasting approximately 10.3 months, and
• 12 Expansions lasting approximately 64.2 month (5.3 Years.)
A “Recession” is commonly understood to be defined as a significant slowdown in the US Economy over 2
consecutive quarters as measured by the Gross Domestic Product (GDP). The GDP for the 1st quarter of
2022 was a negative 1.5%. If the 2nd quarter should also come in at a negative number, then it would be a
good indication that we are in a recession.
“It's a recession when your neighbor loses his job; it's a depression when you lose yours.” -President Harry Truman
Why would we expect to be heading into a Recession?
Inflation is running at 40-year highs. As measured by the Consumer Price Index (CPI) inflation was:
- May 2022 - 8.6%
- January 2022 - 7.5%
- January 2021 - 1.4%
According to the US Energy Information Administration the average price of a gallon of gasoline in January
of 2021 was $2.42 and in May of 2022 it was $4.55.
In order to reduce inflation, the economy must slow down. The simply understood cause of inflation is
that too many dollars are chasing too few goods.
The Federal Reserve is in a Monetary “tightening mode”. Because of the high rate of inflation, the Federal
Reserve has begun raising short-term interest rates and reducing the money supply. As of the end of
June, the short-term interest rates have been raised 3 times this year. The short-term rates were at .25%
at the beginning of the year, have been raised to 1.5% as of June, and are projected to reach 3.5 to 4.0%
by the middle of next year. In addition, they have reversed the flow of money being added to the
economy and have begun a process of Quantitative Tightening with the intent of removing rly $1.5 trillion
dollars from the economy.
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” -Mark Twain
What we know:
- Stocks and bonds are down over 20% this year - Bear Market.
- The cost of practically everything is much higher than it was at the beginning of the year – High Inflation.
- The cost of borrowing has gone up significantly this year. 30-Year Mortgages have gone from 3.1% at
the beginning of the year to 5.81% as of the end of June.
- Interest rates on US Treasure bonds have also gone up. The 10 Year US Treasury went from 1.5% at
the beginning of 2022 to 3.0% at the end of June.
- The Federal Reserve has stated they will continue to raise interest rates as high and as often as necessary
until the rate of inflation comes back down to their planned level of 2%.
What we don’t know for certain:
- We don’t know for sure whether the Federal Reserve can slow the economy enough to tame
inflation without pushing the economy into a significant slowdown (Recession). But it seems likely
that a Recession will happen and historically they last around 10 months, although it is not clear
that we will do so. Many economists are expressing confidence that the US economy is strong and
will be able to deal with inflation without a recession.
- We don’t know for sure where the bottom is for stock and bond prices, but if we look at history
for a guide, the average decline for stocks is around 33% and the S&P500 is down around 21% as
of the end of June.
- Bonds have been hit hard this year, but it looks like the worst for bonds is priced in. The increase
in interest rates mentioned above means that investor’s bonds are paying more interest (2x as
much). If the economy does go into a recession, a common tool used by the Fed is to lower the
short-term rates which means that bond prices will rise. In that case, we can enjoy the higher
interest being earned on our bonds and may see price appreciation if rates go down due to a
- We don’t know how long the Bear market will last but again history suggests that they last
approximately 12 months, and we are 6 months into this one.
I began my career as a financial advisor in December of 1987. Since that time there have been 17 periods
where the S&P500 was down at least 10% and 4 of those times that it was down at least 20%. Ed has
been a financial advisor since 1994 (14 down periods and 4 recessions). Even with all of that collective
experience, I won't tell you that we predicted what has happened in the first half of 2022, but I will tell
you that we did plan for it.
Each of you, our clients, has an investment plan that takes into consideration your specific financial goals,
your time horizons and your tolerance to risk (both your capacity for risk as well as your preference). The
success of the plan is not based on any short-term performance of the bond and stock markets, rather it
is based on their historical long-term performance. Of course, the results of the past are no guarantee of
the future, but using a long enough time frame, it has proven a valuable and reliable tool.
Ed and I would love to believe that we can tell you “Don’t worry; it’s going to be ok,” and that you actually
won’t worry, but I’m not sure that will work for everyone. So, PLEASE if you are worrying, PLEASE call us
and share with us your concerns so that we can ensure that your plan properly addresses your concerns
and reassure you that they do. The Future is Looking Brighter!
Lee E. Kerr
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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
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