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The Value of Hard Truths

September 2022

My wife and I recently took our oldest child on his first college visit. It was one of those surreal moments in parenting, as I can clearly recall going on the exact same trip with my own parents what seems like just a few short years ago. Visiting students and their parents listened attentively as our tour guide listed popular majors among the student body, many of which sounded like … a lot of fun. While tempted to say something like, “But what about finding a job?!” I kept my mouth shut, per my wife’s anticipatory instructions.

It would have been helpful if a career counselor chimed in, “When choosing a major, students should note that we have observed an inverse relationship between ‘fun’ of a major and job offers upon graduation. Please consult the engineering students if you would like to follow-up on this topic.”

I have always thought hard truths are too often avoided when discussing matters of importance. While not fun to hear, or deliver, hard truths often succinctly and matter-of-factly summarize a situation and set expectations for realistic outcomes, leading to better decisions throughout a process. Despite these attributes, hard truths are unfortunately rarely uttered when speaking to the masses, largely because no one wants to be a party-pooper.

As we enter the midterm elections, how refreshing would it be to hear a political candidate share a hard truth about a complex issue? “You’ve asked what I would do about rising insurance premiums. Chances are, nothing. Premiums have been rising my entire life – it’s delusional to think that suddenly I’ll reverse that trend. But I do hope to get Tamiflu covered by insurance. That’s my healthcare platform.”

Since knowledge is power, we want to do our part herein to make sure investors are aware of the hard truths the markets have been facing this year.

Hard Truth #1

The financial markets have been greatly aided by “easy money” policies since the Financial Crisis.

The global economy has weathered numerous shocks over the past fifteen years. Since the Financial Crisis, we have had the Flash Crash, the Euro Crisis, a Taper Tantrum, an Energy Bust, another Taper Tantrum, and, of course, the Covid-19 Pandemic — to name a few. In response to each said “crisis,” either the Fed, the government, or both would step in to rescue the markets with a policy response. The “heroes” in this saga hail from both political parties during the terms of three Fed presidents. (Apparently, protecting investment account balances is an idea that we can all get behind as a nation.) In their fight for “market stability,” our heroes deployed basic tools such as stimulus checks and tax cuts, as well as more complex ones that carried names like TARP, ZIRP, QE1, QE2, Operation Twist, PPP, ERC, QE Infinity, etc.

Hard Truth #2

Now, central banks are trying to quickly unwind much of this stimulus accumulated over the past 15 years in a frantic effort to fight inflation.

Trying to right-size a decade or two of easy money policies within the span of a year is a daunting task. The “easiest” action to take is to normalize interest rates, which the Fed is in the process of doing. The Fed has raised the Fed Funds rate from 0% to 3.25% in the past six months, which is one of the quickest moves on record. Interest rates affect everything from stock and bond valuations to the affordability of houses and cars. Consequently, the value of many financial assets has dropped sharply this year, as you are well aware. In the past, this is the time when our heroes would step in to help us all out, but…

Hard Truth #3

Inflation makes this time a bit different.

I know, that is an oft-mocked phrase in the world of investing, but we believe it applies to 2022 in ways it has not for 40+ years. As of this writing, the Bloomberg U.S. Aggregate Bond Index is down 14% year to date, while the S&P 500 is down 22%. Bloomberg’s 60% Stock/40% Bond Index is down about 19% year to date, which rivals the negative results witnessed in 2008 and during the Great Depression as one of the worst years on record for “balanced” portfolios.

The response to interest rate hikes has also been unusual, leaving investors without a reliable roadmap of what is to come. Since 1980, the Fed has embarked on 8 interest rate hiking cycles. In every single instance, the S&P 500 was higher one year after the date of the first interest rate hike (March 17, 2022 for those keeping score at home). That trend seems likely to break this time, particularly since Fed Chairman Jerome Powell is more concerned about slowing inflation than protecting investors. At a recent speech in Jackson Hole, WY he stated, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”1 To summarize it all, it’s a bit different this time around.

We realize that these hard truths seem a bit pessimistic, but there are other truths that argue for brighter times ahead for investors. For starters, the market has already priced in somewhere between most and too much of this “grim” news.

If you don’t believe us, we invite you to look at the futures markets and Wall Street estimates for data points such as interest rates, GDP, inflation, and corporate profits.

Second, in our view, emotional reactions in investing rarely work out for the best, whether “Should I go to cash?” or “Why don’t I own more of this stock and less of that stock?” If following one’s gut was the best solution, piles of investing books would say, “Trust your instincts!” and countless studies would conclude that investors routinely beat the market over time. Sadly, neither of those exist.

On a related note, it is a hard truth that time in the market works, while timing the market is exceptionally hard to do. Scores of investors have benefitted from simply staying the course. There are many who want to pick their spots to turn risk on and off in their portfolios. The former is quite easy to do, the latter quite difficult. Trying to consistently enter and exit the market at the “right” times is near impossible.

Last, whenever we sense bearishness amongst our clients (or our employees) is too high, it is helpful to come back to another hard truth: Over the past 100 years, U.S. stocks have produced positive returns over a single year roughly 70% of the time, 85% of the time over 5 years, 95% of the time over 10 years, and 100% over a 20-year period. Future investment performance can never be guaranteed, but it has been a truth that investing works, if you stay the course.

All market data is sourced from Bloomberg unless otherwise noted. (1) Source:


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