I was in Best Buy over the holidays looking for a Christmas gift. When I’m out in “looking mode,” I always tend to find something else that was never on my radar to begin with. Does that happen to you? We’ve needed a new dishwasher, so I thought, “I’ll check some out quick… surely my wife would appreciate a new one for Christmas. “I’m a guy 😊. Even the lower- end units were far more than I paid for my last non-dish-drying dishwasher. Maybe I’ll just hand wash for now on.
The shopping experience reminded me of a recent conversation with a client who runs a manufacturing company that produces useful household products such as trash cans. He told me, “We’ve raised our prices to augment the wage hikes necessary to keep people working as well as the cost of steel and containers. And we have no plans to decrease them.”
The likelihood of the cost of certain items going back down is about as likely as a business owner telling an employee they hired at $25 per hour that they are adjusting them back down to $18 per hour because the supply chain issues have been sorted out. I’m sure they’ll understand. Thankfully, technology reduces prices over time on certain goods (think flat-screen TVs). But lots of stuff we consume has probably experienced a permanent increase… like trash cans and travel costs. This begs the question, “with inflation rising, is the stock market bound to be upended ?”
Let’s layout another question before we dive into the first one. The stock market has seen substantial price appreciation over the last few years. Since the bottom of the financial crises in March 2009 (almost 12 years ago!), the S&P 500 ha s compounded at roughly 17.5% annually. This pales in comparison to the 40% annualized returns since COVID-induced low that occurred in March of 2020. This begs the second question; “is the market too high and due for correction?’
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A short personal story to begin. I purchased a home in a nice neighborhood here in Colorado Springs in 2004. In 2016 I sold that home for 50,000 more than I paid for it☹️. I thought to myself, “that stinks… 12+ years of interest payments and no meaningful appreciation in price..” That same property between 2016 and 2021 increased $242,000. So in twelve years , it averaged a dollar gain of $4,200 per year. And in the five years following, it averaged ten times that amount? Sounds reasonable (written with heavy sarcasm).
The most significant equity bull market in our recorded market history began in 1982. Eighteen years later, it ended the Dot.com bubble pop on March 24th, 2000, and then began a substantial decline. The S&P 500 closed at 1,527.50 on that bull market “high” point. Since that time , the S&P 500 has averaged a 7.5% annualized return-not bad at all, but a far cry from the market’s recent 12-year annualized run of 17.5%.
How we choose to view things alters our perspective.
If I were to calculate the average growth on my home between 2004 and 2021, it would just be so-so. If I figured it only from 2016 to 2021, it would seem to be creating a bubble through extreme appreciation. If we view the value of the S&P 500 over the last few years, we may see it as “too high.” Conversely, If we we consider it through the previous 18years, we may see it as running just below long-term averages. If I had kept my house and finally sold it in 2021, I would have one view of my investment. But I didn’t keep it until 2021. I sold in 2016. Therefore, I have a different view of my investment. The problem is that the house didn’t change. The only thing that changed was the data set I was measuring, which caused me to make an internal observation. And it’s this random observation that ultimately constructs the lens through which I view new information… average or bubble, too high or room to run, inflation problematic, or inflation good. We tend to tread water for long periods, then all the growth, inflation, or whatever you want to call it, Comes in bunches. If we made money the easy way… as average rates of return earned each year predictably without much heartburn, then everyone would be a successful investor. Instead very few are.
As financial advisors, we plan based on averages even though we know for certain that’s not how we earn returns. We do this because averages become reliable over long periods of time. Over short period of time they are unreliable as your internet during a zoom call. Here is a graph of S&P 500 stock market returns categorized by percentage gains since 1926. Looking at it this way is incredibly useful in adjusting your perception of how things grow.
Did you know that we almost never make the average? The average return of the S&P 500 since 1926 is right around 8% annualized. Guess how many times S&P 500 made within 1/2 a percent of 8% in a single calendar year since inception? 2 times (out of 94). Why does this matter? When we have strong years, it doesn’t mean doomsday. It simply means we’ve been making more for a period, and because of that , we expect to make less somewhere along the way… so we can get to the average. No need to be surprised or run for the hills; it simply the way it works. Every time we have a year above average, get prepared for one below it. You can see from the above chart that the S&P 500 was down over -30% in 2008. If you reacted to this market decline and changed the strategy to get out of the market or become more conservative, you would be very unhappy investor at the close of the calendar year 2021. Of the 13 years since 2008, only two have fallen to the left side of the 0%. The other 11 years have all been positive, with many of the substantially so.
We must view current themes (inflation high markets) through a much longer lens. If we can do that , our short-term fears will be drowned in long-term reliability.
Let’s take a look at how the S&P 500, specifically, fared in high inflationary years. Here is a chart showing the S&P 500’s return by year, with the blue representing the years inflation rate.
If you take the time to study it a bit, you’ll see that theres no apparent connection between high inflation and bad market returns. It may be easier to point out just the opposite. Let’s zoom in because we have an interesting observation to make.
I picked the consistently highest inflation period represented. If you count the number of years tracked in this segment, it’s 24. The number of down years is 6. That means that in the substantially higher inflationary period of the ’70s and the ’80s, we had a positive market return over 70% of the time. Additionally, I ran a spreadsheet of S&P 500 returns since it’s inception- 94 years ago (it was called something different until 1957, but the concept dates back to the 1920’s) The calendar year returns above zero occurred 65 times, while returns of zero or below occurred 29 times. Again, positive 70% of the time. Have we had inflation since 1928? I’ll let you answer that one.
Above is a table showing the highest years of inflation and the corresponding return of the index during that year. There are 17 years represented. Care to guess what percentage of these high-inflation years had positive stock market returns. You guessed it… 70%. Can the market be down when inflation is high? Sure it can. Is inflation a vendetta of positive market returns? Hardly.
This is why these short-term, fear-building headlines about inflation and presumed high market don’t carry much weight around here. We are focused on your plan over a long period of time to get to the 70% that will drive your plan and future forward. We’ll let everyone else overthink it and react inappropriately.
Warren Buffet’s long-time business partner Charlie Munger said in the Great Panic of 2008-2009, “If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about market fluctuations.”
In other words, thinking about the market being high or inflation’s eventual impact are examples of spending time with the wrong thoughts. We need to spend 2022 focused on strengthening our ability to withstand the undeniable. temptation to adjust course whenever a certain highly uncomfortable market panic occurs. It’s a waste of time trying to figure out when they will happen. Your focus should be on preparing to respond logically when they do.
Let’s turn down the headline volume in 2022 and go outside for more walks. Let’s check our investment accounts less often (I check mine once per year😳). If we experience some dark moments, let’s hold onto truth instead of the eroding nature of fear. If we can do this year in and year out, we’ll be amazed as we reflect on our progress over time. We’re not predicting a market top or a market bottom in 2022; either of these will occur at a perfectly unpredictable time. We are predicting that adjusting the lens through which you see things and being mindful of what you give your attention to will provide you with a stronger foundation on which to stand. And in 2022, stand we will, in the contest of the fear we’ll most certainly be sold.
Joel Malick currently maintains the Accredited Investment Fiduciary (AIF®) and Accredited Wealth Management Advisor (AWMA®) designations. Joel and his team at Steadfast Wealth Co. recognize that running this race for the long term is one of the greatest challenges you’ll face in your lifetime. Thus, they combine critical planning and investment strategies with real-life perspectives. Their consultation is provided at no additional cost to Alliance 403(b) Retirement Plan participants.
Sources:
1- Nick Murray January 2022 Newsletter
2- https://russellinvestments.com/us/blog/inflation-history
3- https:// WWW.macrotrends.net/2526/sp-500-historical-annual-returns
4- https://awealthofcommonsense.com/2021/10/inflation-vs-stock-market-returns/
