Must Be Present to Win
Watching the stock market’s slide can be a frustrating time for investors and advisors. And it seems like nothing in the advisor’s tool kit is working except cash. And as the chart below shows, cash has historically been by far the worst investment in the long term compared to stocks.
So as discomforting as it may feel, we believe that staying the course and not letting the market induce a panic type of “get me out of here” reaction is the best strategy.
How did we get here and why do we believe staying the course is the best strategy?
The rise in interest rates has been a big catalyst for the stock market’s woes. The Federal Reserve (Fed) continues to raise rates in their effort to tamp down inflation. The Fed has a good track record of being both the arsonist and fireman.
The Fed’s multiyear policy of keeping interest rates at zero and buying huge quantities of government bonds and mortgages has been a big part of creating asset (stocks, bonds, houses, etc.) inflation. This policy of stimulus continued long after the economy recovered from the COVID induced slowdown.
And our government did a great job of sending massive amounts of stimulus money into the economy, which created new demand while supply was being diminished due to COVID. The combination of these two policies worked together to create the big increase in consumer inflation.
So now the fireman is coming to put out the fire he helped light. And how long it will take before they realize that inflation is already heading down is unknown.
Housing usually leads our economy and with 30-year mortgage rates more than doubling while housing prices increased due to the policies mentioned above, the median mortgage payment has gone through the roof (see chart below).
This is already slowing the housing market, which will slow the economy and reduce demand for many of the goods and services that spiked during the pandemic.
We are already seeing a big drop in energy prices as well as other commodities. Below is a chart of the price of copper over the last 12 months. Copper is sometimes called Dr. Copper because of its ability to diagnose upcoming strength or weakness in the economy. As you can see, the price of copper is down about 25% this year.
So why do we believe that staying the course is the best strategy given all this uncertainty and volatility?
Because what the charts are showing is the fact that much of what the Fed is trying to accomplish is already reflected, at least to some degree, in sectors of the financial and commodity markets. Prices of commodities are coming down and prices of houses are coming down to account for the increase in mortgage rates.
We don’t know when, but it is certainly possible that when the market first sniffs a change in the Fed’s monetary policy and the economy’s subsequent rebound, it will not wait around for everyone to get on board. You must be present to win when the market decides to rebound.
As always, please don’t hesitate to call with any thoughts or questions.
Any opinions are those of Beach Foster and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information contained here does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Past performance may not be indicative of future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.