Time Traveling to Past Market Declines
We heard a great story recently when dining with a friend in Long Island. This friend is one of the more talented financial planners we have ever met. Let’s call him John. John was sharing a recent situation with one of his clients where he addressed the investor’s concern of declining stock and bond markets.
Tell me, doctor Where are we going this time? Is this the fifties? Or nineteen ninety-nine?
As the story goes (read with strong New York accent in mind):
John was meeting with a client voicing concern about the declines in his portfolio. John asked this client to come outside of the office so the two could jump into his DeLorean. When they got to the parking lot, there was, of course, no DeLorean time machine. John admitted that while there was no time machine, if there was he would set the flux capacitor to 4/20/2000. This was a month after the dot-com disaster. In the heat of the despair, he would tell the client, 22 years younger, to buy the surviving tech stocks, like Apple and Amazon.
In the next stop on this “ghost of bear markets past”, John would set the clock to 2008—the middle of the financial crisis—and tell the investor to buy stocks and bonds while the world was crumbling.
As a final stop, he would set the clock to April of 2020, the peak of COVID. He would alert the client to buy stocks because people were not going to turn into walking zombies and the economy would reopen again.
So, here we are today, in the middle of a market sell off. What should you do? While there is no time machine or Doc Brown, there is a great lesson in this story.
So take me away, I don't mind But you better promise me, I'll be back in time
Impatience is not your friend. Do you remember the opening scene of “Back to the Future”? Marty enters Doc’s house and when he can’t find him, he plugs a guitar into Doc’s amp and gets blown into a bookshelf after strumming one chord. Doc calls him moments later and tells him not to plug into the amp because there’s a possibility of a slight overload.
If you’re impatient with the current market and plug into panic selling, you might get blown away like Marty, and you won’t have a time machine to correct your actions.
Take a breath. Yes, interest rates, inflation, and Russia issues are some of the factors behind current market volatility, but behavioral reactions are exacerbating this volatility. When everyone else is blinded by fear, we prefer to focus on the data and look for opportunities.
On May 11, the Bureau of Labor released the numbers for April’s Consumer Price Index, noting it rose .3% as compared to March’s 1.2%, and April’s YoY inflation hitting 8.3% versus March’s YoY of 8.5%.
This CPI data indicates small steps in the right direction for inflation, but it wasn’t enough to quell the market sell off, as the three major indices continued their slide along with growth and tech stocks.
The release of April’s Producer Price Index on May 12 also had a negligible effect on improving market sentiment. It seems the PPI for final demand only increasing .5% versus March’s 1.6%, and YoY final demand dropping from 11.5% to 11% in April wasn’t enough to assuage market fears.
Remember our friend John who said he would’ve told his client to set the DoLorean’s clock to April 2020, peak COVID fears, and buy stocks? We see current market conditions as a similar chance to begin to buy select stocks, looking for low risk, high return opportunities, as well as opportunities in companies that are currently experiencing stock price declines, but as a result now have more realistic valuation ratios.
We believe there is most likely more pain ahead, but we are now looking to capitalize on the declines. Living through several 25-50% declines in stock markets has given us the experience to time travel back to those periods and learn from past mistakes.
And as we mentioned in our monthly market review for April, we’ll continue to monitor inflation and market expectations, and as fears subside, we’ll look to add risk back into the portfolio.
Wishing all safe travels this summer.
Disclosures
INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES, INVESTMENTS OR INVESTMENT STRATEGIES. BLOOMBERG IS THE SOURCE OF MARKET DATA. INVESTMENTS INVOLVE RISK AND ARE NOT GUARANTEED. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RETURNS. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED HEREIN.