Market Concerns Never Go Away
Market concerns are a reality that investors must live with over the entire course of their investment journey. Most recently, there have been concerns over inflation, and COVID, and Ukraine, and Israel, and the coming election, and whatever else was on the news this morning. I don’t mean to belittle any of these issues, they are all significant. It’s just that there is constant noise in the investment marketplace, always has been, and always will be.
Consider the headwinds the U.S. economy has weathered over the last 25 years. You could go all the way back to the dotcom boom and bust of the late 1990s and early 2000s, fears around Y2K followed by the horrific terrorist attacks on September 11th. Fast-forward to 2008 and 2009, when we witnessed a global recession with underlying ties to real estate and sub-prime lending. Throw in the wars in the Gulf and Afghanistan, the global pandemic, interest rate hikes, and more.
Yet here we are in 2024, having recently hit all-time highs in the Dow Jones Industrial Average, the S&P 500 and NASDAQ.
Yet here we are in 2024, having recently hit all-time highs in the Dow Jones Industrial Average, the S&P 500 and NASDAQ.
A disproportionate percentage of the S&P 500 is driven by just seven companies, which runs against the grain of how we build portfolios at TCI. We don’t focus on picking individual stocks or even individual indices. We believe in owning global market portfolios, for decades, that help our clients achieve risk-adjusted return based on their unique individual goals and risk tolerance.
That means, we take the range of potential portfolio outcomes and invest where we think we will have the highest likelihood of helping clients achieve their goals. We reduce the potential for homeruns. At the same time, we reduce the potential for striking out. If you remember the book and movie, “Moneyball,” you’ll appreciate our focus on winning the game by hitting steady singles and doubles.
Over time, markets go up because they represent shares of publicly-traded companies globally. It’s part of the job of those publicly-traded companies’ CEOs to produce profits for shareholders. The CEOs who are successful, and most are, steer their companies through adversity and noisy markets, creating upward momentum for investors over time.
Instead of worrying about inflation today, consider how it has trended over the past 50 years.
Figure 1 – Inflation: U.S. Consumer Price Index from 1970-2022
It’s hard not to focus on inflation as a market concern. Inflation has been on the minds of investors since it reared its ugly head coming out of the pandemic. When inflation is high, the response of central bankers is to raise interest rates as a cooling measure, yet, despite stubborn inflation and rising interest rates, bonds have remained a valuable asset for portfolios. A good proxy for inflation, interest rates and fixed income is the 10-Year Bond yield. In 2022, the 10-Year Bond yield rose 150%, the largest increase during any one calendar year since the 1970s. The 10-Year Bond yield continued its volatile performance in 2023 rising an additional 29% in the first half of the year until it started to come down dramatically in the fourth quarter. Bond prices react inversely to the 10-Year Bond yield, and typically move with inflation. Thus, bond prices were down dramatically in 2022 and recovered nicely in 2023. Much like the stock market, bond markets are also unpredictable in the short-term which emphasizes the importance of diversification.
So, how do recent inflation concerns compare to other periods of high inflation?
Figure 1 shows the growth of inflation via the U.S. Consumer Price Index, cumulatively and for individual years from 1970 to 2022. To determine inflation growth between years, identify the column representing the initial year (top row) and the row corresponding to the final year of that period (left column). The meeting point of these two is the inflation growth or reduction between those two years. Note 8.7% in 1973 and 12.3% in 1974. In 2021 and 2022, inflation was around 7% for two years in a row, which is why it’s still top of mind.
If you look along the bottom row, you will see the cumulative inflation from 1970 until 2022. During that period, annual inflation has averaged 3.9%. Think of all the significant economic, political, global and technological events which have occurred in the last 50 years.
Inflation can cause dramatic short-term movement in the markets, but its overall impact over the past half-century has been slow, steady growth.
Instead of concentrating investments in individual developed countries, consider a more global approach to portfolio management.
It’s natural to have a home bias and lean toward investments in U.S. equities because it is what we are comfortable with and what we know. But when you look around the world for the highest market returns across developed countries, the results can be dramatically different from year to year.
Figure 2 shows market returns by country from 2004 to 2023. In 2023, Italy produced the best return, up 37.1%. Then came Spain up, 31.9%, and Denmark, up 31.2%, with the U.S. next, up 26.5%.
Figure 2 – Equity Returns of Developed Markets by Annual Return from 2004 to 2023
Each colored box represents a different country’s annualized returns. It’s impossible to know beforehand which country will outperform and which will underperform, so we’re better off owning as many as we can given the positive expected returns collectively.
In 2022 though, the U.S. was down, -19.8%. In 2019, we were fifth. The only year out of the past 20 that we came in first was in 2014.
The data in this chart illustrates the importance of owning a little bit of companies in all developed markets – because you never know which country will outperform from year to year. This is why we intentionally build portfolios diversified through equities in all developed countries. Calling back to the “Moneyball” analogy — this is part of our philosophical investment strategy to win the game by hitting steady singles and doubles over time.
Instead of checking your portfolio every day, consider a less frequent, perhaps happier approach.
The S&P 500 was up well over 3,000% between 1983 and 2023, from 150 points to nearly 5,000 points. However, depending on how often you looked at the performance, you may have felt happy or pained by the results. Let’s say if you were to look at investment performance and the market was up, you had a happy day. If you looked and the market was down, you had a painful day.
Figure 3 – An Artistic Representation of S&P 500 Returns from 1983 to 2023
In Example A of Figure 3, if you looked at the market every trading day from 1983 to 2023, you would have had more down days than up days. You would have experienced 19 years of pain over the 40-year data set, even though the market was significantly up over those 40 years.
In Example B, if you looked at investment performance once a month, you would have had an average experience and only 14 years of pain. In Example C, if you only looked annually, you would have felt only seven years of pain with a generally positive emotional experience.
In all three examples, you’re looking at the same positive 3,000%-plus total return over a 40-year period. The only difference is how often you looked and how that impacted your investing mindset and outlook.
Trust in the plan. Trust in yourself.
There will always be concerns in the market, but for long-term investors, they shouldn’t keep you up at night.
Inflation is material, but not as important as headlines may lead us to believe. World events are material, but many are outside our realm of control. CEOs of publicly-traded companies will work to adjust to inflation, react to world events and continue to make money for the shareholders to the best of their abilities. You benefit from that as an investor, and you benefit from the power of compounding returns.
Instead of worrying over market concerns, let’s focus together on those levers that you can control in your financial life: how long you work, how much you save, how much you spend, how much risk you want or need to take in your investments. Focus on what’s really important, accomplishing the goals you have and living your life to the fullest. We’ll be here to help you along the way.
Charts courtesy of Dimensional Fund Advisors.
