Welcome to another Zynergy Retirement Stock Market Update for 4/26/22. The market had another rough day in what has been a tough month wrapped in a challenging year. The S&P 500 closed today more than 12% off its all-time high while the tech-heavy NASDAQ has shaved more than 23% from its all-time high in November.
The Bear Market Begins
For many of you reading this, the stock market correction we have experienced in 2022 is a new sensation. We have not had a significant pull-back in stocks in almost two years, and aside from the Covid correction of early 2020 which lasted only a few months, we have not seen a bear market in almost 13 years. In my opinion, this left an entire generation thinking that stocks only go up and when they do fall, it is a buying opportunity. History shows us this is incorrect.
The only consistent predictor of future performance is purchase price based on earnings. This is a difficult lesson that many investors learned in the bursting of the tech bubble in 2000 and the bursting of the housing bubble in 2007. If you are properly diversified and you buy an asset that is cheap based on its earnings, you will do well in time. If you purchase an asset that is expensive based on earnings (or purely on speculation), you will almost certainly underperform in time. This is a lesson that has remained consistent over thousands of years of investment history.
Respect The Tide
The current environment is a clear symptom of investors forgetting this rule. As I discussed in my year-end review letter, investors feasted on cheap or free capital as liquidity flooded our system. This capital needed to find a home and many “put it to work,” day-trading on Robinhood and speculating on assets with a zero-sum game such as cryptocurrencies. This capital was not responsibly used by businesses and households. No; it created an environment of rampant speculation comparable to taking the mortgage money to the casino.
Now, the hangover of that sugar rush is clear. Easy money is over. Our government learned the dark side of continuing to stimulate with reckless abandonment…inflation. This leaves the powers that be with little choice but to cool the economy by removing liquidity. There is no other way to control the inflation problem at hand.
This cooling has created a situation where the economic tide is going out. As Warren Buffet said, “When the tide goes out, we can see who has been swimming without a bathing suit.” Many are without suits.
How Do I Play It Safe?
I recently heard three professional money managers on CNBC when asked where the safest place to park their money was and given the choices of: Treasury Bonds, Gold, Cash, or Apple stock. All three of them picked Apple stock. That’s right. Three professionals who are supposed to know what they are doing think an overvalued tech stock is safer than historically safe assets. The world of investing has become topsy-turvey, and as a CFP® who has lived through two bubbles and watched the fallout, I can tell you with certainty that there is no technology stock safer than Treasury Bonds or federally backed cash when economics get tough. The mere thought is absurd, no matter how high inflation may rise.
My point is that the unwinding of this mentality will take time. This current stock market update– its volatile and dangerous for those who do not understand it (and apparently to some who do). Like the power of the ocean when out for a swim, if you do not respect the power of the markets, they will drown you. We are in the process of unwinding this mentality and it will most likely take some time.
As you well know, we have been broadly diversified in our portfolios since early last year as we noticed signs of this speculative bubble. We got even more conservative last year as 2021 ended. This left our 2021 returns a bit lower than we would prefer, but it was in preparation of this unwinding. Despite the volatility, we are very comfortable with how our portfolios are allocated. Depending on your age and risk tolerance, we are seeing far less volatility in our portfolios than in the rest of the market or even our own benchmarks. We recently liquidated the commodities fund we purchased in December and January, locking up returns of 20-40% (depending on your account). This capital will go into cash, short-term treasuries as this unwinding plays out.
Should I Be Worried?
If you are retired, do not fear this volatility, as we are well positioned for it and have plenty of cash to maintain your lifestyle for years to come. If you have time until retirement, fear not, as we will ride the wave. We are expecting a time when this shake-out leaves valuations at compellingly low levels. Much like late March of the Covid selloff, when the next stock market update comes, we will reposition the portfolios to a more aggressive posture to pick up bargains and make a call for additional cash for those of you with extra cash lying around. In the meantime, we wait.
My recommendation to you all is to turn off CNBC, remove any financial news from your phone so you do not receive regular alerts, and go out and live your life. Corrections and market selloffs are a part of investing, and we are not concerned. You should not be either.
Have Any Questions?
Please call Lauren, Bill, or me if you would like to talk about your particular situation. We are here if you want to discuss your account, the market, or your financial plan. We are available at the office or on our cell phones. As always, thank you for the faith that you have placed in Zynergy.
