We believe it may be unwise to use the current negative sentiment as a reason to get out of the stock market.

Why is it unwise? Well as we shared in last week’s blog post the quickest way to go broke is selling when your investments are down. You might say, “Dave, I can’t afford to keep losing money”. To that, I would say that the economy will turn around and portfolio values will go up. I cannot predict when, could be next month, next year but it will turn around and remember…

  • Recession / market corrections are measured in days (average -30%)
  • Recoveries are measured in years (average +114%)
  • Over the past 20 years most of the best days (largest increases) in the stock market are in the same month as the worst days
  • The best time to invest is when everyone is selling

Just like we do not know when we are in a recession (until after it has started), the markets begin their recovery in the midst of bad news. It is critical to your wealth to understand this fact: the markets (stocks & bonds) typically reflect where the economy is headed in 3-6 months from today. If you wait for the news to tell you the markets have recovered, the economy has turned around you probably missed out on a good portion of the initial recovery.

The chart below shows the S&P 500 during the 2008-2010 Financial Crisis. What I want you to see is when the market turned (started recovering). It was in the middle of the crisis (all the news was telling us how bad things were) but the market had started its climb.

  • From January 1, 2008 thru March 6, 2009 the market went down 52% (over a 15 month period).
  • From March 7, 2009 thru December 31, 2010 the market went up 89% (over a 21 month period).

We were in the middle of the financial crisis when the market began its recovery. If you had waited for the “all clear” signal then you were still sitting on the sidelines with your losses having missed a huge recovery +89%. Folks this is only the most recent example. We could go back to other times when the market dropped and see the same scenario.

The takeaway lesson can be summed up in this quote from Charlie Munger, the 98 year old Vice Chair and second in command for Berkshire Hathaway. He is still an active participant in running the business and has been Warren Buffet’s “right-hand” man for over 40 years.

“The big money is not in the buying or the selling, but in the waiting.”

Charlie Munger

Dave Conley, CFP

4 reasons stocks are falling and what needs to happen to turn things around.

  1. INFLATION – we need to see inflation continue to fall month over month. We believe this will happen over the 4th quarter of 2022 and continue in 2023.
  2. FEDERAL RESERVE – If they slow the rate of increases (from .75% to .50% or .25%) or stop the rate increases the market should see it as a positive.
  3. SURGING DOLLAR – The dollar is growing in strength, it helps tame inflation but hurts corporate earnings (which drive stock prices). When the dollar is surging foreign investors buy US bonds (now paying higher rates) making bonds more attractive than stocks.
  4. COMPANY EARNINGS – 3rd and 4th quarter company earnings expectations are being reduced. If company earnings for the third quarter are stronger than expected, that will be a positive. Also if we do not see a slew of companies pre-announcing that they are reducing future earnings expectation it will make investors feel better about owning stocks vs bonds.