06.22.22
Lessons From Past Downturns, Played on Repeat
by: Rich Blake
Panicked selling by stressed-out investors at or near the bottom – dreaded capitulation – was witnessed, painfully, in the early spring of 2020.
Experts are quick to point out just what a bad idea it can be to not ride out the storm.
Advisors may feel limited or broken-record-like when telling clients to hold tight for the long haul. Still, data reveals they are justified.
MassMutual’s head of investments, Daken Vandenburg, told his legion of financial advisory professionals to look at the S&P 500 index going back to the early 1980s.
“Importantly, you may notice this is the sixth sell-off of more than 20% since this chart began," he said. "Each sell-off has its own stories, concerns, worries, and risks. In each of them, many investors became fearful and sold near the bottom. And yet, over time, the market has generated remarkable returns over this time period."
Roughly speaking, $10,000 invested in the S&P 500 in 1980 would be worth around $450,000 today, and that is "despite the many sell-offs that occurred throughout this time period.”
Taking the Edge Off
Bradley Lineberger, president of Seaside Wealth Management, uses historic context as a way “to take the edge off the fear.”
“This is the 16th bear market since World War II, and it’s the 18th if you count 2011 and 2018,” he told Investment News. “On average, stocks go down about 30% and the bear market lasts about a year. The hardest part is trying to time one of these.”
Markets are spooked by inflation, particularly gas prices, which are soaring and by the response of the U.S. Federal Reserve which is raising rates aggressively; and there are other economic headwinds, such as the ever-shifting supply chain issues (truck driver shortages giving way to skyrocketing cargo rates and overstocked warehouses amidst shrinking consumer demand), not to mention the Russia-Ukraine war and a collapsing crypto market. It’s a tsunami of worry. The average investor feels little comforted by the likes of JP Morgan CEO Jamie Dimon recently warning of an “economic hurricane.”
Another financial titan, Orlando Bravo, co-founder of private-equity powerhouse Thoma Bravo, in mid-June declared inflation is “out of control.”
Fed As Driving Force
"Don't fight the Fed" used to be a mantra among money managers recognizing the results telegraphed by the Fed as it, for the better part of the past decade, kept rates low and actively added to its balance sheet, goosing credit markets’ liquidity; these days, there's an oft-repeated phrase surrounding inflation and the Fed, and it's this: "behind the curve."
The Fed, led by data measuring macro forces in retrospect, pretty much only can function from behind; it can only do so much, given its limited set of blunt tools – although, yes, it could raise rates more aggressively and tank the markets, causing a recession, quashing inflation.
On June 15, the Fed revealed the biggest rate increase (0.75%) since 1994 and left the market feeling fairly sure that another supersized hike could be in the cards in July.
“We’re worrying about growth and where the Fed takes us ultimately,” said Chris Gaffney, president of world markets at TIAA Bank, speaking to Financial Advisor magazine.
Market participants are being forced to reckon with the gut-wrenching question of whether the Fed could be "chasing something they’re not going to be able to catch?’”
Complicating the message of "don't capitulate" is the distinct sense that things could get much worse, or maybe just a little worse.
The stock market, as of mid-June, was sinking to lows not seen since December 2020, and yet valuations could fall further, as in as much as another 15%, according to Galaxy founder Mike Novogratz.
Meanwhile, if there wasn't enough turbulence in the air, many advisors surely took notice of the first case involving Reg BI violations.
The SEC charged broker-dealer Western International Securities Inc. and five of its registered reps with failing to meet it fiduciary obligations by recommending and selling unrated junk bonds to retirees and other retail investors.
The SEC’s complaint alleges that Western and its brokers violated Reg Best-Interest regulations when recommending and selling $13.3 million of GWG Holdings so-called L bonds that were “high risk, illiquid, and only suitable for customers with substantial financial resources.”
This year, GWG defaulted on its bond interest and principal payments and filed for bankruptcy, according to Financial Advisor magazine.
“Reg BI is clear: Broker-dealers must act in the best interest of their customers,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement. “When they fail to do so, as we allege happened here, they put retail investors at risk and we’ll hold them accountable.”