Uncertainty Reigns

Greetings & Happy Fall.  We trust this note finds you well but likely growing weary of news on the economic front.


It seems no matter where you look there is never-ending ‘recession talk’, inflation, doom & gloom, etc.  Meanwhile, construction is ever-present, banks are lending, unemployment remains low, and most businesses are doing well.  It is a very confusing time to say the least.


Our last note was titled ‘Nowhere to Hide’ and discussed the fact that, thru the first four months of 2022, with both stocks and bonds down over 10%, the financial markets this year had been brutal.  Fast forward a few months and that note is still very relevant.  The main difference is the markets are in worse shape.  The S&P500 is down over 20% year-to-date.  The Nasdaq 100 is off 31% from November highs and the US Bond Index is down over 13% YTD.  Previously the worst year ever had bonds down 2.9%.  Again, nowhere to hide.


We mentioned in May the global markets were trying to discount 40-year high inflation, $100+ oil, supply chain issues, a labor crisis, historic spike in interest rates, COVID threats, and Ukraine/Russia.  Aside from oil falling closer to $80, nothing has really changed on that list.  Markets despise uncertainty.


Most all of the above will work out in time, per usual.  However, to maybe compare things on a personal level: Imagine you committed to upgrading to a new home, then lost your job, got in a car wreck, had a house fire, lost a parent, had to move, and got diagnosed with a major health issue.  All in the same month.  That’s a LOT.  Anyone would be severely ‘frazzled’, to put it mildly.  Markets are no different.  Markets are made up of (confused) people/entities, and they have a lot of reasons to continue to be confused. Again, there is MUCH uncertainty.  That’s how we end up -20%+ on the S&P500 with the Nasdaq 100 -30%+.


Most of the conversations we are having center around a few questions:  Is a recession coming?  Should we sell everything (and buy back lower or when market is better)?  Why are things so bad if the economy seems strong?


Let’s start with the recession question.  Like we mentioned in May, we believe we’re in a recession.  The economy contracted slightly during the 1st half.  That contraction will surely continue as the sharp ramp-up in interest rates by the Federal Reserve works its way thru the system.  They want to slow the economy and that WILL happen.


But here are two thoughts on a recession.  One, they happen – they’re part of the economic cycle and this is not the first, or last, occurrence.  Here is a solid piece discussing prior recessions and how markets performed.


Second, there is ZERO EVIDENCE in history that selling stocks/bonds once we’re in a recession is smart, sensible, or provides better returns than not selling.  Remember, markets look far ahead (Stocks bottomed 11 months before the Fed finished raising rates in 1994/95). MOST of the damage in the markets is done well before any recession and certainly before said recession is ‘declared’.  And, usually, by the time we know we’re in one, markets are already reflecting an economic rebound.


Two more thoughts on markets vs. recessions.  Historically, the most $$ is made coming OUT of recessions.  How/Why?  Simplistically, when fear peaks, most ‘scared investors’ have already sold so prices are beaten down.  Smart, long-term investors & institutions hold/buy and enjoy the fruits of capitalism as markets & economies rebound.


Second, ‘selling now and buying back lower’ is virtually impossible.  Why?  Because you have to be right three times.  You have to be right when you sell and move to cash.  You have to be right when the markets (and economic news) get worse.  And then you have be right again and move all of that cash back into the markets….in the face of horrible news.  Not a single client, mutual fund or institution did that in 2000-2002, 2007-2009, nor the 35% COVID collapse in 2020.  It’s essentially impossible.  It’s a myth.


FRIENDLY TIP 1 – the folks on TV don’t know either. They’re on a program for entertainment and/or advertising purposes, not out of some loyalty to LJI or our clients.


FRIENDLY TIP 2 – trying to game the markets AFTER a 20-30% decline is flat dangerous to your long-term financial health.


What isn’t impossible?  What is logical?  Staying on the side of history.  Understanding it ‘isn’t different this time’.  Markets get smacked every once in a while:  Crash of ’87, Tech wreck,  9/11, housing crisis, COVID.  Over time the market is undefeated.  Companies adjust.  Markets adjust.  In most businesses, things go from fairly good to fairly bad (and back).  That’s how real life works.  However, in the financial markets, things tend to go from flawless to hopeless (AND back).  That’s how we get to extremes.  One key is to try and recognize when markets overshoot.  Acknowledge when extreme fear has taken over – or vice-versa (much harder).


We always need to keep in mind if the market despises uncertainty (a fact), then the BEST buying opportunities are during uncertain times.  Why?  Prices are low.  Simple.  When are things most uncertain?  Tough economic times, elections, disasters, wars, etc.


Here is a great example of how much the markets ‘prefer certainty’.  We all know there is massive political discourse in our nation.  That will likely never change.  Heres’ an amazing fact we recently came across:  Since 1940 the stock market has had a positive return from the day of EVERY mid-term election thru June 30th of the following year.  100% of the time going back 82 years.  ‘100%’ seldom happens in the financial markets.  And it may not happen over the next year.  But the point is, again, going back 82 years, once that element of political uncertainly has been removed from the American equation, the markets calmed down and had solid results.


One last thought about the current economic malaise.  As mentioned back in May, most all of the current issues are likely ‘temporary’.  Oil has retreated.  Inflation will peak if it hasn’t already.  Interest rates will settle down.  COVID seems ‘better’.  Supply chain and labor issues will resolve themselves over time.  I doubt Ukraine/Russia lasts forever.  And one or some of these issues could get worse.  The markets could drop further – they always can.  But that doesn’t mean we should cast aside the history of capitalism and financial markets.


We’re optimistic.  We’re also very cautious in that optimism.  Not because we’re scared, but because we can read, and we can see all the ‘bad’ out there.  It IS bad.  It is a bit scary.  But that doesn’t necessarily make it actionable…primarily b/c most of the ‘bad’ has already been reflected in asset prices.


We talk about ‘fear vs. greed’ a lot in these missives.  Markets are emotional – that cannot be overstated enough.  Historically, at inflection points either fear or greed is extreme.  That is easy to recognize in hindsight.  The good news is we monitor both at all times.  We’ve discussed the AAII Sentiment Survey in the past.  It is simply a weekly poll of Individual Investors.  This week over 60% of those polled were bearish, meaning they were scared and/or believe markets will drop.  This level of fear has been reflected 4 times since 1986:  twice in 1990 (recession), 10/8/08, and March of 2009.  The average S&P500 return over the following 12 months from those 60%+ readings was over +29%.


That last paragraph doesn’t mean the next 12 months HAS to be +29%, or even a positive return.  The point is to simply illustrate, historically-speaking, when things are THIS bad, when the markets are THIS beaten up, and when investors are THIS scared…YOU shouldn’t be scared.  You should be greedy.  You should be looking forward to what is coming.  You should be optimistic in the fact of terrible economic news.  In other words, we’re likely much closer to a rebound than a massive downtick.

We appreciate the opportunity to help you navigate all of this.  We’re here to help and we thank you.




Your LJI Team