By Morgan Christen
CFA, CFP, CDFA, CEO and CIO
Flying can be a joy or a source of anxiety for travelers. Talk with a pilot and they exude confidence, cool as a cucumber with no sense of panic. As passengers, we fear the unknown. When we drive, we have maps, but we also have roads that keep us from drifting off course. When flying, there are instruments but no guard rails.
Pilots learn the 1 in 60 rule, which states that after 60 miles a one-degree error will result in straying off course by one mile, meaning the airport you planned to land at might be a lake.
This rule can also be applied to investing. Decisions you make under duress can have a major impact on your investing outcome. This can be a framework for reviewing, evaluating, and adjusting your plan, but not abandoning it.
The lesson to remember today is that everything cycles. Over the last two years we had an economic crisis that rivaled the Great Depression only to see the stock market rally to new highs. Now, with the constant barrage of news, we see the market looking like we are heading back to the Great Depression.
The pandemic drop along with the shutdown of the economy happened so quickly that many did not have the ability to react (to their benefit). Once the market started to move upward, new investors and folks with fresh funds dove into high-flying stocks, forgetting that cycles change. Forgetting to evaluate the plan put many investors off course.
Chasing meme stocks, crypto and overvalued companies, investors forgot about cycles, their plane is far off course. But for those that evaluated and reviewed their heading (and actually had a plan), they may be off a bit, but they will be able to correct.
The chart below (values as of 5/17/22) shows how much of the S&P 500 down draft has been heavily impacted by just a few stocks.
As of today, the S&P 500 is down roughly 20%, but some technology stocks are down 50-80%. Own those stocks (or the sector) and you may be somewhere over the Pacific.
Looking at losses is no fun and can be a source of pain. But that pain is only on paper at present. More frequently than we have been accustomed to, we hear about earnings revisions that are on the downside.
Companies are evaluating their markets and adjusting accordingly. Wal-Mart and Target realized they bulked up on inventory items that are no longer desired by consumers, they choose essentials over TVs.
Inflation has set in, and consumers responded… adjustments were made. Markets drop, we forgot about that. March of 2020 seems so far back.
As the chart above shows, since 1980 markets have been down intra-year consistently.
Many times, by a large amount, but that doesn’t always mean a negative year.
Talk To Me, Goose
Bond yields are starting to stabilize. Meaning, not only do bonds now look attractive, but the cost of borrowing has hit a sweet spot to slow economic growth and inflation. Fighting and keeping inflation at bay is of utmost importance to the Fed, our economy, and the stock market.
An investor’s lifetime results are determined by how they react (or don’t) during times like these. Adjustments should have been made before you found yourself far off course. There will be times when we veer off, but how do we get back on track? Patience, not panic.
The chart here shows returns in different time frames after a pullback. If you panic today, you stand to throw your future investment success off course. Over correcting your heading in a down market can also threaten to keep your bearing off course. Other than the Great Depression, markets were positive over the next three years. In fact, many moved forward the next year.
Returns would not be possible without risk. The key to success is not to panic and try not to get distracted by the news and headlines. Lean on your team here at Spinnaker to focus on the markets.
Enjoy your life, your family, and friends. Unfortunately, markets like this happen… and they will happen again. Keeping emotions at bay and focusing on the future has shown, time after time, to be a good investment philosophy.
We appreciate your continued support and are grateful for the trust you place in us. We look forward to speaking with you soon.
The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.