As an economic commentator on CNBC was trying to describe how much longer the stock and bond markets might stay down, she said the day-after-day bad news is as irritating as her kids asking, “Are we there yet?” on a car ride. Hearing that triggered childhood memories of my family’s frequent car trips. Around 1970, my family moved from southern West Virginia (leaving all our extended family in WV) to Bradenton, Florida. According to GPS, today that trip would take a little over 11 hours. I am not sure the interstate system was as good back then, but my dad would drive us back and forth, non-stop, many times in the next four years. Dad did the driving, mom read, while my brother, the dog and I rolled around in the back of the station wagon with the seats folded flat and no seat belts on (…52 years ago, nobody wore seat belts in the backseat).
My dad had a few rules on these long car trips: do not touch the back of his seat, you only stop for food or restrooms on the right-hand side of the road and any questions should be directed to mom. If you look at this trip on an old-fashioned map either coming or going, you spend about half of your travel time in the state of Georgia. So, my younger brother and I quit asking, “Are we there yet?” and replaced it with, “Are we out of Georgia yet?” When the answer was yes in either direction, we knew we were most of the way there! Now, let’s take this analogy to its destination: are the financial markets at least out of Georgia? In other words, are the stock and bond markets about to recover or are we stuck in Georgia, i.e., in for more short-term pain?
This past weekend’s edition of The Wall Street Journal ran a front-page article in the Exchange section titled “It Can Always Get Worse.” I read the article, hoping the author was trying to be humorous; he was not. However, on page four of the same section of the paper, an article written by the staff was a little more encouraging. It was titled “The Selloff, and What Comes After.” It focused on the prior history of first-half market drops and how the rest of the year finished. Most of the time, after a bad start to the year, the market improved after time went by. The stock market has always been tied to the economic cycle and it goes up and down based on the economy’s performance. Typically, the stock market has been a leading indicator, meaning it is supposedly looking six months out. It is looking toward the end of the trip. If it looks as if we are going into recession in the future, the market sells off. If we are in recession, at some point, stocks start going up, anticipating better times ahead. The stock market realizes that when you’re out of Georgia, things are about to get better.
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We now have a solid 100-year history of stock market data going back to the 1920s. The market typically has a sell-off of over 20% about every five years. It has always recovered that loss over time. That is why most professional investors do not try to time the market. They invest for the long term and just wait out the tough times because they know it will eventually end well.
A bit of good news inside the recent pain has been rising interest rates. It is not great news for borrowers, but you, our clients, are primarily investors. Yes, when rates go up, the prices on your bonds go down and we have felt this as bonds have had their worst six months on record. But there is a bright side. For years, you have gotten little interest on most of your bonds, but now you are starting to see some yield on your fixed income. That will be a welcome addition in the second half of this year and beyond.
Hopefully, the stock market will find a bottom soon and start to marginally improve. Even if we are in recession and things are not economically perfect, that is when market recoveries start. From an investment point of view, we are not doing anything different other than harvesting some losses for clients who have taxable accounts and can use the current losses to help with future taxes. My professional experience, market history, and my mom are telling me we are almost out of Georgia. Have a good summer.
If you have questions about this information or your overall financial plan, call us today at 412-630-6000. Our experienced financial advisors are here to help.
All data for this article from The Wall Street Journal and public sources.