Tim Hoyle, CFA, Chief Investment Officer
thoyle@haverfordquality.com
Following a cursory perusal of the financial press this past week, you were likely inundated with foreboding headlines including:
More Strategists Say a Storm Is Brewing in the U.S. Stock Market[1]
Investors must brace for a ‘great deal of pain’ as central banks move to taper[2]
Morgan Stanley downgrades U.S. stocks: ‘We see a bumpy September-October’[3]
U.S. Stock Market Faces Risk of Bumpy Autumn, Wall Street Analysts Warn[4]
The seasonality effect, the many potentially negative headlines ahead of us, elevated valuations, and the fact that that markets have come a long way since experiencing any meaningful pullback, makes predictions for a tumultuous autumn the obvious choice.
Source: Haverford, FactSet Research Systems
Past performance is not a guarantee of future results. Index returns are provided for illustrative purposes only. Indices are unmanaged, do not incur fees or expenses and cannot be invested in directly.
Historically, September and October have held more negative surprises for investors than other months. I expect that this fall will bring its fair share of negative headlines. It is easy to rattle off the usual suspects: the pandemic, supply-chain bottlenecks, inflation, tax increases, monetary policy, and China. A negative inflection in any of these topics, or more likely a topic not on the list, could trigger a market sell-off.
Source: Wall Street Journal
Past performance is not a guarantee of future results. Index returns are provided for illustrative purposes only. Indices are unmanaged, do not incur fees or expenses and cannot be invested in directly.”
It is both easy and prudent to predict an imminent down-turn. Easy because highlighting the reasons above lend an erudite feel to your comments. Prudent because you never want someone to go “all-in” on your comments. It is also behaviorally easier to always invest with a bad outcome in mind. As Jack Bogle aptly pointed out, “If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.”
As the great Charlie Munger once said, “Invert, always invert: turn a situation or problem upside down.” If there is a high probability of a sell-off, why haven’t investors sold to get ahead of others selling? Why haven’t markets sold-off and can those conditions persist into the near future?
Haverford’s opinion is that the answer is rather straightforward. The massive tailwinds of extraordinary monetary and fiscal stimulus combined with tremendous corporate earnings growth has powered stocks higher. As long as these persist, the stock market is likely to remain strong. The bearish calls highlighted above are almost all predicated on an end of these tailwinds. These tailwinds will abate, but the policies of low interest rates and accommodative government spending are likely to remain persistent. In such an environment we continue to believe there are few viable competitors for stocks. The stock market can continue to be described in terms of “TINA” (i.e. there is no alternative) even though this description is over ten years old.
Predicting the near future is a nearly impossible effort. But fully accounting for all sides of the prediction and ensuring that you have imagined what a bad scenario looks like is an exceptionally valuable exercise. If the chance of the 20% correction is as exciting to you as Amazon Prime Day, then congrats. You will likely be a successful long-term investor.
If, after reading the foreboding headlines, there is a pit in your stomach, that is OK too. You may be relying on your assets to fund your retirement, or a major life change could soon be upon you. It is probably time to reassess your investment allocation to ensure that you are positioned for long-term success.
I am confident that no matter the situation you find yourself in, buying Quality investments is the answer.
[1] https://www.bloomberg.com/news/articles/2021-09-10/deutsche-team-sees-risk-of-hard-equity-valuation-correction
[2] https://www.cnbc.com/2021/09/13/investors-must-prepare-for-great-deal-of-pain-in-markets-strategist.html
[3] https://www.cnbc.com/2021/09/07/morgan-stanley-downgrades-us-stocks-we-see-a-bumpy-september-october.html
[4] https://www.wsj.com/articles/u-s-stock-market-faces-potentially-bumpy-autumn-wall-street-analysts-warn-11631439002?mod=itp_wsj&ru=yahoo
