Are We There Yet?

It’s summer. Travelers have packed their bags and vehicles and are making their way to beloved destinations – the beach, the mountains, the city. Anyone who has taken a road trip with kids will have heard and identify with the refrain, “are we there yet?” 

With inflation running at 40 year highs, mortgage rates climbing, and stock markets searching for a bottom, you are likely searching for a map to see if we are getting near a destination that we can feel good about again. 

Inflation

The long term inflation average since 1926 is 2.91¹.  After the recent decade ending in 2021, inflation only averaged 1.75%². There has now been a pronounced inflationary regime change. 

In the last 95 years, the longest stretch of sustained high inflation that averaged 6.19% occurred from 1966-1985. Good news is that stocks during that period, were still able to outpace inflation. In about 4 in 10 years since 1926, inflation was greater than 3%.

The numbers we are seeing now are rather eye-popping and appear a few times in the past in the US. Filling up your car or grocery cart these days is a swift reminder of the inflation reality. We have to look back to the 1970’s and 1980’s to see numbers like we are today. Inflation numbers as of May 31, 2022, show inflation changing year over year by +8.6%. Are we there yet? Is inflation topping?

Economics have their opinions and they range widely. The simple truth is or the reality is, no one knows if inflation is peaking yet. Usually, these things take time to work themselves out. The inflation question that matters is what can you do? 

Our advice is to trim and limit discretionary expenses for now, continue paying off consumer debt monthly, shore up your emergency fund, buy I-bonds through the Treasury for a portion of your emergency fund that is not needed for a year. And, don’t succumb to panic or fear about inflation. 

A professor once said, “don’t follow the short term trend line out the window”. We may be in for a period of higher than average inflation. Trends change, just like the one we are coming into now. 

Markets

Since the beginning of the pandemic in 2020, markets have experienced wide swings up and down crash endowing into near peak values in broad markets by 12/31/2021. What goes up, also goes down and roughly six months later, global markets have been whipsawed lower. An interesting historical note is to reflect on the fact that the US markets declined in only one day during October of 1987, approximately the same percentage decline as we have seen during 2022.

Index	ACWI3	SP5004
YTD Performance (as of 6/30/22)	-20.94%	-19.96%

Even the bond market has experienced the pain of declines, as interest rates have been moving upward.

Index	Bloomberg Aggregate Bond5
YTD Performance (as of 6/30/22)	-10.35%

So a traditional 60% stock, 40% bond portfolio that many retirees and institutional investors use is experiencing declines around -16%. 

Investors the world over are asking, are we there yet? 

We would prefer to give you an answer, but once again no one knows. Instead, we can remind you of why you are investing in stocks. Investors must acknowledge and accept that to get the potential rewards stocks offer, periods of markets declining are a necessary pain to endure.

Let’s remember why we invest. What are the capital markets and why are they important to you?

First, what are capital markets? The St. Louis Federal Reserve⁶ offers a succinct definition on their website: “Capital markets are financial markets that bring buyers and sellers together to trade stocks, bonds, currencies, and other financial assets. Capital markets include the stock market and the bond market. They help people with ideas become entrepreneurs and help small businesses grow into big companies. They also give folks like you and me opportunities to save and invest for our futures.”

Markets have a mesmerizing power over time to allow patience, long term investors to build wealth. Historically, markets have generated long term value in spite of world wars, The Great Depression, recessions, and pandemics. While similar events may present in the future, there is also a silent wealth drag called inflation. Inflation is one of the biggest risks retirees  confront over their lifetime. 

In order to be successful long-term or help their chances of success, investors must learn to lean into risk taking for assets that will not be needed for 7-15+ years down the road. As previously mentioned, stocks have proven an historical ability to outpace inflation over time. 

Let’s examine two options for investing in retirement: Exhibit A: Outwit Markets or Exhibit B: Accept Markets.

Table: How to Make Money Using Capital Markets

You may not be able to control the market, but you can control your personal expenses, your financial plan testing, your portfolio, your emotions, and how much you pay to access the market.

The world’s capital market is like a weighing machine. Over time, money flows accrue to companies that produce valuable products and services. There are ~18,500 publicly traded companies around the world⁹. These businesses seek to deliver value to consumers, governments, and other businesses using their human capital, intellectual property, and ingenuity as they attempt to solve problems. Some will fail, some will do fair, while others will do well, and still others will overdeliver on producing value. Over time, a broad basket of global stocks have delivered 9.21% per year⁷.

One of the contradictions in investing  is that every investor will lose sometimes, in order to succeed over time. If you willingly accept that some losses (or price declines) are essential, then you can base your investing choices on historical evidence. While evidence is not a guarantee, it does affirm that your investing choices are rational and helps keep you from emotionally reacting by selling during price declines.  

By investing broadly in a diversified, low cost manner, you can allow capital markets’ mathematical odds to be stacked in your favor across a predetermined time horizon. If the odds are stacked or ranked in your favor over time, the wins will ultimately outweigh the losses. The chart below (source: Ben Carlson⁸) shows that the longer your time horizon and commitment to holding onto stocks, the better your odds are to see your diversified stock portfolio have a positive result. 

When it comes to stock investing, sometimes, what is wise does not appear very smart, especially in the short term. Yet, investors should make a plan, seek advice, and remain committed to their plan when markets do what should be expected – rise and fall.
Are we there yet – referring to higher inflation or the recent market decline? We don’t know. However, we are here for you. Call us if you have questions or would like to discuss your plan or portfolio.

Jason K. Branning, CFP®, RICP®

Disclosures:
The information provided in this report is for informational purposes and should not be considered a recommendation or solicitation to purchase or sell any particular security or investment strategy. Investments are not insured, subject to market risk, including the loss of principal. Investment strategies described may not be suitable for all investors. Equities are subject to market risk meaning that stock prices in general may decline over short or extended periods. The information contained does not consider any investor’s investment objectives, particular needs, or financial situation. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate. Information in this presentation has been obtained from sources believed to be reliable but cannot be guaranteed. Additional information is available upon request.