Head Medicine for the Market’s Malaise
by Hodges Investment Team, on October 4, 2022
We’ve arrived at the end of the 3rd calendar quarter in pretty rough shape. There is no doubt that investors are not having any fun in this environment, and it seems like every time we turn on the television or read the news, we are just inundated with more bad news. We can surmise that some of you might be rethinking just what to do in this type of environment, because this is not anything remotely comforting. If it is any consolation, not only are we your advisor, but we are also opportunistic long-term investors with our own money. We, too, are feeling these same effects. Investing is never about the here and now, but always about the future. In this note we will attempt to provide some relief and some items to ponder as we look to the future.
The market, as we broadly define by looking at the S&P 500, is now down -13% in just 6 weeks. We don’t know where this falls in terms of % decline in X amount of time, but it has to be pretty high up the scale in terms of its historical severity. Year to date, the index sits -25.25% from where we started the year. To put that into perspective, there have only been 3 times since 19571 where the index closed out the year down -20% or more; 1974, 2002, and 2008. Needless to say, we’re at a historic level.
Now for some good news. There are myriad technical and sentiment indicators that are telling us we are nearing a level of maximum historical pessimism. To us as investment managers, that tells us that we are nearing a bottom, as it’s pretty rare to see such universal pessimism. Do we know at what future date or price level the bottom will occur? We do not, but then again, nobody else does either. So, the question is not “What else can go wrong?”, but rather “How much of what can still go wrong isn’t already factored into current stock prices?”
What Do I Do Now?
It is at market junctures like this where it makes sense to look at risk through a reverse lens. The current risk is not that the market will go down another 5, 10, or X%, but rather that it will turn violently to the upside (as it tends to do after large downturns) without you participating. So, if you are invested, we feel the wise advice is to sit on your hands and be patient, as time will reward your patience. Selling out and waiting for a better time is also not advised, because a “better time” arrives completely unannounced and with next to zero fanfare. If you are holding cash that you’ve earmarked to invest, the market is giving you a chance to get it invested.
Our goal in working with clients is to help them achieve long-term investment success, while simultaneously removing long-term regret. “Woulda, coulda, shoulda” is that regret. We do not want any of our clients to utter that phrase to themselves 10,20,30 years from now. The kick-yourself-factor with this type of regret can be huge, and the leading cause of such regret is hesitation.
So, what is hesitation with respect to investing? These are the common thoughts that are probably crossing investors’ minds: “I want to wait for a clearer picture.” “I want to wait for the market to get better.” “I want to wait until (insert: any topic du jour) is solved.” The topics du jour are inflation/interest rates, Russia/Ukraine, the mid-term election, and will there be a recession. All of these are temporary, and as time passes, they will be resolved. Just like all the numerous crises of years and decades past.
The Economy is Not the Stock Market
Here’s a little historical perspective on how markets work coming out of downturns. Stock prices tend to emerge from their low points on roughly the same trajectory as their final leg down. Meaning the rebound off the eventual bottom will be quick and sharp. If you doubt this observation, please look at some charts from all the big downturns and see what the rebound looked like; ’87, ’02, ’09, ’20. So why does it work this way? What is the reason? Pure emotional selling, or what the industry calls it, capitulation. It’s the emotional breaking point where the full effects of the “flight” emotion have kicked in. In fact, there’s a famous quote about this; “Market bottoms are made by emotion, not fact.”
With respect to recessions and market behavior, they tend to move at different times, and rarely in unison. What do you mean by this? Economic data is backward-looking, and the market is forward-looking, and this is precisely why markets tend to move higher before recessions are officially announced to have ended.
The chart attached in the email is one that we feel to be the most important concept to remember. Time in the market, trumps timing the market. Look at the difference of missing just the 10 best days in the last 30 years; your future return was only about half of what it should have been. That’s an extremely powerful data point that should be examined closely and hardwired into our brains. To get the full effect of the market’s long-term returns, you need to be always invested.
As we turn the page into Q4, we hope that these points have been helpful. Perhaps these will have provided you with clearer thoughts about the current environment. If you would like to talk about a plan of action to get invested, or review your current situation, we’re always here to help.
We’ll leave you with a few quotes by some famous investors.
Downturns are where the money gets transferred from the impatient to the patient. -Warren Buffett
More investment opportunities have been lost (sitting out of the market) waiting for a recession than in the recession itself. -Peter Lynch
Be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a shade less black than the day before. -Jeremy Grantham
1Prior to 1957, the S&P 500 contained less than 500 stocks.
HCM is an Investment Advisory Firm registered with the Securities and Exchange Commission (“SEC”), is a wholly owned subsidiary of Hodges Capital Holdings and serves as investment advisor to the Hodges Funds. HCM is affiliated with First Dallas Securities, Inc, a broker-dealer and investment advisor registered with the SEC.
This discussion is not intended to be a forecast of future events and should not be considered a recommendation to buy or sell any security. Past performance is not indicative of future results. Investing involves risk. Principal loss is possible. Investing in smaller companies involves additional risks such as limited liquidity and greater volatility. No current or prospective client should assume that information referenced in this communication is a recommendation to buy or sell any security or is a substitute for personalized investment advice from your individual advisor. HCM does not provide tax or legal advice. Consult your tax or legal advisor for any related questions.
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