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It's easy to feel the angst and concern among investors regarding the stock market. While we believe the market is the most reliable way to maintain long-term purchasing power and grow your wealth, this does not mean the market is going up every day.
Our beliefs are informed by nearly a century of market history. Since 1926, the percentage of rolling 10-year periods with positive market returns is 94%. Extend the time frame to 20 years and the percentage rises to 100%.
Nevertheless, temporary declines are a routine part of the stock market. There have been 16 market corrections of 20% or more since the end of WWII. That translates into a pullback about every four years on average.
WHY UNCERTAINTY MOVES STOCKS
Markets go up and down, not up and up. Market corrections happen and no one can accurately predict them. Short-term uncertainty is part of the deal. The reason outsized returns exist is because of uncertainty.
Behavioral finance research has clearly demonstrated that losses feel twice as bad as the pleasure from making money. This translates directly into the fear investors have about market declines. It’s not in our human nature to maintain a rational and consistent perspective on market risk. The graph below depicts the cycle of emotions that many investors follow.
Several clients have recently noted the disconnect between so-called Main Street businesses and the stock market. This is an excellent observation. Economic growth includes publicly traded companies as well as millions of small businesses in the U.S. Most large public companies fared well during the lockdowns, while many smaller businesses did not. Since large public companies are what constitute the stock market, this helps explain why the market has outperformed the overall economy for the past 19 months
HOW INFLATION & TAXES IMPACT THE MARKET
Market valuations depend on earnings and economic slowdowns hurt corporate profits. Of course, rising inflation along with the overhang of tax hikes soon to be coursing through the economy have a similar effect.
Everyone can see that the economy is awash in excess money from stimulus checks, extended unemployment benefits, rent relief, and the Federal Reserve keeping interest rates artificially low. The result has been a dramatic increase in inflation. Inflation is a silent wealth killer and impacts everyone.
It was reported recently that wage growth over the past year was erased because of inflation. We could see more signals like this over the coming months.
You might feel anxious about the stock market, but the alternatives likely won’t put a smile on your face. Bond yields are mostly below the rate of inflation. Gold has languished. The most reliable long-term place to invest is still the stock market.
Spend your energy focusing on how your investments align with what matters most to you. Let us know how we can help. Start there.