We thought it would be appropriate to share the chart below to illustrate that we have been in this type of volatile stock market before. The chart shows six bear markets going back to 1980 and how the S&P 500 behaved within the life of each. The circles highlight the various double-digit positive returns during these market downturns. They can be called “false starts”. The truth is, in the moment, it is almost impossible to know if market movement is a false start or indeed the end of the bear market. It is absolutely a losing battle to try to time the market.
Cash earmarked for equities will continue to get worked into the market systematically. Volatility is expected to continue and we do not want to get lured in by a potential false start. The economic data that comes in weekly and monthly is conflicted. Some data like jobs (non-farm payrolls), wages, and rents are holding up well and do not look recessionary. Other data like home prices, commodity prices, and freight costs have weakened substantially. This, along with 3.75% increase in short interest rates is why we are having the volatility. Now is the time to position the portfolio for 2023 and focus on companies that have consistent earnings and strong free cash flow.
For those who are fully invested, we strongly recommend staying the course. The following chart shows the long-term path of the S&P 500, including recessions, going back to World War 2. The path is overwhelming positive and many corrections are short lived. In my experience, investors who dial back equities in periods like the current one almost always buy back in at higher levels.