KCS Quick Take – May 2, 2022

KCS Wealth Advisory (Byline: Ken Waltzer)

May 2, 2022

Don’t Be Scared of Mr. Market

There’s little question that so far, 2022 has been a dismal one for both the stock and bond markets. On April 29, the last trading day of the month, the stock market retested its mid-March lows. Hitting its lowest point of the year at the end of a month is particularly stressful for investors because you will see the results on your brokerage statements. (When lows are hit mid-month, they are less visible because they don’t show up on statements.)

Some of you may panic (or already have) and think about going to cash or making a similar ill-advised move. This is exactly what Mr. Market wants you to do. “The Great Humiliator” would be pleased as punch to see lots of amateur investors bail at just the wrong time, while the pros swoop in and profit from their fear. After 45 years of investing, I’ve seen this happen time and again, with market wealth moving from small investors to big ones because the former repeatedly forget the adage, “Buy Low, Sell High” and do just the opposite. Don’t fall for this!

Market declines vary from short and mild like the one we saw last September, when the S&P 500 dropped a mere ­–5.2%, to prolonged bear markets like the global financial crisis of 2007–2009, during which the S&P 500 declined by –55.5% over a 16-month period. While severe bear markets like the latter occur only once every couple of generations, much milder declines happen pretty much every year. And they all end the same way: markets recover and hit new highs.

Today, with the S&P 500 and ACWI both down –13.4% for the year, you may be thinking that the market will go lower from here. Maybe it will; maybe it won’t. But one thing is certain: it will go back up again. And if past is prologue, the rebound will likely be fast and furious. (Humans suffer from “recency bias,” which makes us think that what happened most recently will continue into the future. But the world doesn’t work that way—things change, often overnight.)

Remember that scary market correction at the end of 2018? I’ll bet you don’t, because that was over 3 years ago, and most of us have short memories. Back then, the S&P 500 started declining at the beginning of November. By Christmas Eve, it was down –19.6%, just shy of the –20% drop that arbitrarily defines a bear market. The pundits came up with all sorts of reasons why this was happening, including fear of additional import tariffs, Brexit, and an inverted yield curve (does the latter sound familiar?). Soon, people started whispering the “R” word (recession). The chart of those couple of months is not pretty:

S&P 500, Nov. 7, 2018 to Dec. 24, 2018

What happened when the market reopened right after Christmas? It pretty much went straight up for the next 14 months, only to be (temporarily) derailed by the COVID-19 shutdowns. The feared recession didn’t materialize until well over a year later, for reasons that the market could never have anticipated (who in late 2018 knew that we would have a coronavirus pandemic in early 2020?). In the interim, the S&P 500 soared +44.0% from its Christmas Eve 2019 low.

S&P 500, Dec 24, 2018 to Feb. 19, 2020

Think you’ll be clever and sell before the market goes any lower, and then buy back in at the bottom? You will fail. I have seen many people try this and the precious few who end up better off succeeded because of dumb luck. The other 99% either sold right near the bottom or didn’t buy back in until the market had recovered most or all its losses (or even later, after it reached new highs). Many did both, selling at the bottom and then not re-investing until the market had surpassed its old highs. Needless to say, they were worse off than they would have been if they had done nothing.

Market declines are scary, and Mr. Market likes it that way. Managing your emotions during these periods can be difficult, but emotions are the enemy of successful investing. How to deal with worry and fear? Stop watching the market—that’s your investment manager’s job (if you have one). Remember that just as spring follows winter, market recoveries follow market declines. And if necessary, speak with your personal KCS financial advisor, who is always there to help.

Yours truly,

Dr. Ken Waltzer, MD, MPH, AIF®, CFA, CFP®

The KCS Investment Department

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