Written by: Steven B. Bouchey, CFP®
The headlines in 2022 have been overwhelming; the Russia-Ukraine conflict, Covid-19 lingering on, China’s lockdowns adding to supply chain disruptions, and inflation at 40-year highs!!!
So, what has changed on the inflation front? The May consumer price index (CPI) was red hot, rising +1% during the month and year-over-year the rate of inflation came in at + 8.6%. Inflation is a moving target which means that the Federal Reserve Open Market Committee may change its course of action with each new report. They had no choice but to hike rates 0.75% this past week, which they did. It is the first time since 1994 where they raised rates by 0.75%.
The Fed has lost some of its credibility and needed to send a strong message to America that it will do its best to bring inflation under control. Jerome Powell the Fed Chair, Treasury Secretary Janet Yellen (a former Fed Chair), and the White House stated a year ago that inflation was “transitory and temporary”. Well, they obviously had their heads stuck in the sand as they missed the opportunity to hold off inflation by initiating rate hikes last year rather than last month. US consumers have a lot less money because they are paying so much more for goods and services, especially essentials like gas, food, and heating bills. Let’s hope the Fed can bring us in for a soft landing and not push us into a deep recession.
These are uncomfortable times for investors, especially this week when so many have that capitulation feeling, the action of surrendering to owning stocks. In some ways, this may be a good sign as we have so much bad news built into the markets so any good news will turn the markets around. Investors want to and need to be invested when they reverse course.
If you had cash to invest and/or have never been invested in stocks, then this would be a good time to buy at discounted prices with the S&P 500 down over -20%. So, if this is a good time to buy stocks, why should investors want to sell stocks?
If investors took a snapshot picture of their returns over the last 15 years, which includes the financial crisis of 2007-2009 when the S&P fell -50% and the beginning of Covid-19 early 2020 where the S&P lost -34% over a few short weeks, in hindsight, these losses look like a blip on the radar screen. This current bear market will also look like a blip on the radar screen in hindsight. Over the same 15-year period, the average annual return for the S&P was +9%, Nasdaq +14% and bonds +3%.
A little-known fact and I thought it was appropriate for these times is that the two lions in front of the NY Library have the nicknames “Patience and Fortitude”. At the time, NYC’s Mayor Fiorello LaGuardia told a reporter, “The people of this city have two cardinal virtues, Patience and Fortitude”. Mayor LaGuardia felt in the 1930s that New Yorkers needed patience and fortitude to get through the Great Depression.
Stocks have recovered from every correction, bear market and recession and gone on to make new all-time highs, the best part is the world hasn’t come to an end yet. Investors who panic and sell, usually lose out when the markets bounce off their lows on their way to record highs.
I am going to steal Mayor LaGuardia’s line and say that investors need patience and fortitude now more than ever.