I’m Sleeping Just Fine, You Should Be Too
By John Owens CFP®, EA, ECA, CPWA®
Last week saw inflation beat estimates in a bad way, causing a selloff in the market. Continued selling on Monday pushed the S&P back into bear market territory. Gas prices are well over $5 a gallon in many parts of the country as the summer travel season picks up. Crypto is proving to be anything but an inflation hedge. The yield curve is inverted again. And many recent IPOs find their prices well below their market debut. Yet - as the guy who does most of the trading here at Brooklyn FI - I’m sleeping just fine these days. And you should be too.
Don’t get me wrong - there are many scary headlines - Inflation, Recession, Famine, World War 3, etc. The market is experiencing a sell-off that we haven’t seen in a couple of years. Amid this chaos, I’d like to offer some counter-points and reminders to cut through the noise.
I’m not here to minimize your stress or invalidate your anxiety. I’m here to do what I do best as a financial planner: offer some perspective.
The first is a reminder that helped me get through the last sell-off in March 2020; I’m borrowing it from Josh Brown. That is that the world will only end once. Our economy has navigated all of these threats previously and survived. I do not doubt that it will again. This alone should be a solid enough reason to exercise restraint and avoid overreacting to the headlines and pandemonium in the market.
Now, anything short of the world ending can still be quite scary, but let me supplant that with some takes on the current state of the economy and stock market, that should provide us some degree of hope.
The market is cheaper than it was a few months ago. You’re getting more shares for the same dollar amount of contributions. In a time when just about everything feels like it’s getting more expensive - air travel, gas, cars, groceries, etc., one thing is getting cheaper - the stock market. If your favorite grocery item went on sale (mine’s pork chops - I’ve been trying to up my Grillin’ game this summer) you wouldn’t buy less of them - you’d probably buy more. With major asset classes down about ~20% from the start of the year, I’m all the more excited to be contributing to my 401(k) and getting more shares for the same amount of money.
Consumers drive the economy - and are doing OK still. Cash in the bank - while losing purchasing power against inflation, is a key indicator of how the American consumer can navigate a potential recession. Consumers have more cash savings than they did pre-Pandemic and pre-Global Financial Crisis, and debt as a percentage of income is lower than it has been in most periods over the last 40+ years.
But Consumer Sentiment Sucks - and that’s good? The University of Michigan puts out a Consumer Sentiment Index on an ongoing basis - and as someone who called Ann Arbor home for a few years, I’m always intrigued by what it has to say. The latest report has sentiment at 50.2 - well below the long-term average of 85.6. Why is this good news? Because the average subsequent 12-month return in the S&P 500 from a sentiment trough is nearly 25%. Consumers feel shitty about the stock market because it’s done shitty lately. Which is often an indicator that it’ll do better in the future. There’s a lag in this sentiment and reason to be somewhat optimistic.
A recession may happen - but we just don’t know when it will occur, how long it will last, what will do well, and what won’t. I recently had a client say, “You’re saying there’s a decent chance of a recession, and you’re comfortable with how we’re allocated?” I said yes. Because the only tool we truly have against the risk that we can’t predict is diversification - and thankfully, this client is well diversified. Looking back at prior recessions, we can tell that each asset class fares quite differently. In 2008, the best performing asset class (bonds) outperformed the worst performing assets class (emerging markets) by nearly 60% that year. In 2020, the last recession, by year-end, we saw a 25% spread in returns - with Small-Cap up 20% and REITs down 5%. Having just spent a week in Las Vegas, I’m reminded that many folks will only tell you what they won, not what they lost. It’s fun to point out a winning idea you had in the last recession - or one you have for a future recession, but if you got it right before, it was probably luck, and there’s nothing to say you’ll get it right in the future. Diversification is pretty nice, considering none of us can actually see the future.
This is not to say there aren’t scary days on the horizon. Inflation could continue to climb, and interest rates will also keep moving upward in the coming months. There may be layoffs, continued market volatility, and even a potentially bumpy landing for the inflation situation - one that ends in a recession.
It’s more to say that despite all these scary factors, there’s evidence, backed by reason and history, that suggests life will continue on and that there are better days ahead. Diversification is still the only free lunch. Consumers have cash in the bank despite their salty outlook on the market, and as a long-term investors - we love a good sale. Everything else is noise. So sleep well, stick to your plan, and maintain perspective. We’re right there with you along for the ride.