While the current administration’s trade and fiscal policies are commendable – to narrow the trade and budget deficits and eventually strengthen the U.S. economy, their approach has been unprecedented and unconventional – roiling the financial markets.
In almost every scenario we can imagine, we see heightened volatility and risks in the short-term (next three and a half years) and opportunity in the long-term (five years and longer). With volatility comes opportunity, and history shows that discomfort often paves the way for profit.
Instead of presenting you with data and charts explaining that “this time it is different” let’s recognize this moment for what it is: another chapter in the story of how our democratic and capitalistic system drives change. It’s not always graceful, but it works. And if current policies do in fact contribute to an economic crisis, we will get through them as we have every time before.
Crisis Talk Isn’t New
Many news outlets and economists would have you believe the worst is yet to come. We heard the same when Obama first took office in 2009. Coming off the heels of the worst financial crisis of my lifetime, he injected the economy with $800 billion in stimulus that many said would cause runaway inflation… which never happened.
Regardless of what policy changes are enacted, the economy and companies are generally in good shape. Inflation is under control, unemployment low, interest rates reasonable (with many earning interest on their savings outpacing inflation), and corporate earnings healthy. While most predict these policies raise the risk of the economy falling into a recession, such a risk is always present and a normal part of the business cycle. Recessions are generally short-lived – in the U.S. since World War II they’ve averaged just ten months. For investors, consumers, and businesses to survive them, the best approach is to have a very manageable amount of debt that can be serviced if your income or revenues fall, a cash reserve, and the ability to cut 20% or more of your expenses or overhead.
The Market Decline Wasn’t a Surprise — It Was Inevitable
The current downturn in U.S. stocks was not unexpected. Historically, stocks experience a down year one out of every four years. For this reason and others, we have been preparing our clients for a meaningful market decline for some time – if for no other reason than statistically it was overdue. Consider this, in the sixteen years since the 2008 financial crisis when the S&P 500 finished the year -38.49%, the S&P 500 has had just three down years (2015: -0.73%, 2018: -6.24%, and 2022: -19.44%). That’s quite a run!
U.S. stocks and the S&P 500 in particular are coming off one of their best 15-year periods ever, returning more than 12% a year on average, well above the 10% its averaged the last 90 plus years. The last several years, those gains we driven by the largest tech and related companies – whose concentration in the S&P 500 (more than 35%) and valuations we warned against. The current sell-off is affecting those companies more than others. As Warren Buffet famously said, “Be fearful when others are greedy and greedy when others are fearful.”
Why Diversification Matters More Than Ever
Many clients of Elevation Wealth Partners are surprised to see that when they view the performance of their accounts in their Elevation Wealth portals, their accounts are down less than U.S. stocks in general. The reason being: they are well-diversified and this year international stocks have held up much better than U.S. stocks and bonds (if you hold them) have provided the capital preservation and income they should.
Looking back a year ago, did you think it was a good time to invest? Probably. We did (though we always think it’s a good time to invest. For more on that topic, read Nick Magguilli’s excellent book Just Keep Buying: Proven ways to save money and build wealth). Despite the decline in U.S. stocks this year, they are still at the level they were just 12 months ago! Things are not as bad as others would have you believe.
Timeless Advice from 2022
In July 2022 our colleague Kevin Goulding wrote “How to Survive a Close Encounter With a Bear” when the S&P 500 was already down almost 20% for the year. His advice in the column is as relevant today as it was then… and as it will be in 50 years.
- Have a financial plan that makes sense to you and the discipline to stick with it.
- In that plan, identify 20% of your spending that could be cut if you really needed to.
- Be well-diversified in your types of investments (U.S. stocks, foreign stocks, bonds, etc.) and rebalance your accounts periodically so that you are “selling high and buying low.”
- In taxable accounts, “tax-loss harvest” positions to reduce your tax bill.
- Go for a hike and get some fresh air. Call your mother and pet your dog (or cat).
- Contact your Wealth Advisor – You are not alone in this journey and we are here to be a sounding board and voice of reason during these sometimes stressful and confusing times.
