Sent February 2022
There is no doubt that markets (both bond and equity) are nervous…arguably they are the most nervous they have been in a long, long time. One day last week we observed stock markets start 300 points down on the Dow Industrials’ Index, proceeding to go 600 down by mid-morning, and then just to kick a man when he’s down, went to a painful nearly 1,100 points down by noon…and yet incurring all this noise to end crazily up 100 points by end of day. Numerous global market interplays make those changes occur, and the economic pundits are never short with offered rational as to what culprit is really behind it (inflation, Ukraine, interest rate hikes, labor shortages, etc.).
But, what’s really behind it? Nervousness. Nothing more, nothing less, just market nervousness caused by the uncertainty of the day. If you want different things to be nervous about, or feel good about, just wait until the next day and it will start all over again.
Facts About Market Fluctuations
For that reason, in this month’s letter to you I want to help by putting some big numbers in context. I think understanding those numbers will help keep you settled down when others are shaking and allow you to sleep at night. The fact that the knowledge provided would make you the smartest person at the company water cooler (or Keurig Expresso maker) is frosting on the Mocha Frappuccino cake.
In no order of importance, but all of relevance to you:
Intra-Year Stock Market High to Low Point
Please know the average intra-year stock market high to low point is 14.1%[i]. Average. As in – “not unusual”. As in “happens all the time”. What is unusual is when markets do NOT decline by 14%. On the Dow Industrials index, that would mean to be an “average” year, the average would have to drop more than 5,000 points, which means drops of 1,000 points are diddly.
Number Of Companies
The entire USA publicly traded market has just shy of 4,000 companies listed on it. The economic press commonly refers to ‘the market being up 26.9% for calendar 2021’[ii] – a phenomenal performance year to be sure – but what is NOT known by the average investor is that only 5 companies account for fully for 45%[iii] of that gain (Apple, Microsoft, Google (Alphabet), Nvidia and Tesla). Those 5 companies represent roughly 19% of the total United States market capitalization. Thus, market gains were actually fairly narrow, and maybe those 5 companies were overblown a bit as their products certainly benefited from the COVID at-home sequestrations.
Diversification
Diversification is your friend if you let it be. The above technology companies took a beating in the recent sell-off and portfolios went down, but I ask you to reflect on the fact that the average stock on the NASDAQ composite index went down 43.6% from their 52-week high – but the index itself went down 12.7%[iv].
If you want to “swing for the fences” and buy an individual stock you can obviously do so, but you also strike out more. Diversification allows you to capture the winners mentioned above, while avoiding the concentration of losers mentioned in this section. Our clients own shares in over 14,000 companies and that’s tremendously helpful protection on both of those fronts.
Inflation
One of the reasons for the current panic in markets is the heightened concern about inflation (which I wrote about to you last month). Inflation might cause interest rates to rise, and the Fed Chair Jerome Powell recently testified before Congress saying interest rates might go up… which frankly, they should. However, from an investor standpoint, the greatest risk inflation poses is not interest rate increase (which will benefit investors long term) but the erosion in purchasing power. In that light, I want you to appreciate this complementary set of numbers;
i. The CPI (the Consumer Price Index) has gone from 133.8 to 277.9 over the 30-year period ending November 2021, an increase of just over 2 times.
ii. Over the same period, the S&P 500 index (stocks) has gone from 330.22 to 4,367 (as I write, even with the market down in 2022), which is an increase of over 13 times.
The above evidence would demonstrate stocks are ‘scary’ in the short-term, but absolutely necessary to financial success in the long-term.
Avoiding Emotional Decision-Making
The recounting of the these very objective numbers should help you to take some of the emotion and fear out of current events and better understand the concatenation of various market realities. Equities are absolutely the greatest daily fluctuation in our clients’ portfolios (they don’t have crypto-currencies with us – thank goodness) but they are also the greatest long-term protection against the uncertainties of the moment. Warren Buffett, the Oracle of Omaha, has stated the case for equities best in two comments:
1. “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
2. “The stock market is a device which transfers money from the impatient to the patient.”
As the old movies on submarines would also quip; “Steady as she goes.”
It remains my deep and distinct honor to serve you.
Patrick Zumbusch
Founder and CEO
Wellspring Financial Partners
[i] “There’s Been A Market Sell-off – Now What?” (Chase / J.P. Morgan, January 21, 2022)
[ii] “2021 Stock Market Year In Review” (Anna-Louise Jackson and John Schmidt, Forbes.com, January 3, 2022)
[iii] Private Correspondence with Dimensional Fund Advisors (“Year In Review”, Apollo Lupescu, January 18, 2022 though these 5 stocks made up 51% of the return since April 2021 (above referenced article))
[iv] “There’s Been A Market Sell-off – Now What?” (Chase / J.P. Morgan, January 21, 2022)
