JB's newsletter to help you set and reach your financial goals

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April 27, 2022

Keep Calm: The Market is Helping Us Achieve Our Goals

     I hope this newsletter finds you all doing well and enjoying the beautiful weather.  My goal is to summarize in plain English what's happening with the stock market and the economy and direct your attention to things that will help you thrive in retirement. 

    The stock market notched a new all-time high on January 4 of this year and has since gone haywire.  The S&P 500 index is down around 13% year-to-date (YTD).  Quickly rising interest rates have also sent bond prices tumbling.  The Barclays U.S. Aggregate Bond Index is down around 8.5%.  It's rare for stocks and bonds to go down at the same time, but not surprising given what's needed to normalize the economy after the effects of COVID.

     I want to discuss three things in this newsletter. 

1. Remind you of our goal for investing our money in the first place. 
2. Look back at how stocks can help us achieve our goal, despite this recent bout of temporary declines. 
3. Talk about some of the silver linings that are not being talked about in the media.

     The reason we invest our money today is to replace income during our working years and to protect our purchasing power at some point in the future.  We invest to help our future selves to do what we want, when we want, and with whom we want.  As with everything worthwhile, it requires sacrifice.  Sacrificing enjoyment of our money today and subjecting that money to some level of risk in the future to protect against inflation. 

     What Ron and I do is help our clients determine how much to save, where to contribute (if still working), and set the appropriate level of investment risk.  We do this primarily by using diversified, low-cost index funds since
actively managed mutual funds have a poor track record of beating their benchmark indexes.  Our process removes all emotion from the equation.  Our expertise in different account types and of the available investment options in the market helps us be very efficient with achieving client goals, much more efficient than investing in a target date retirement fund that you might find among the options in your 401k Plan.  When done correctly, time mitigates the risk of short-term losses and rewards long-term investors with returns in excess of inflation.

   This leads into number two.  Historical returns give us confidence that stocks outpace inflation, but also reminds us that the current level of volatility shall pass.  Over the past 5 years (as of Monday's close), the S&P 500 total return (including reinvested dividends), has achieved a total return of 91%, or 18% per year on average.   Looking back 10 years, the total return for the S&P 500 is 263% for an average annualized return of 26%.  Year over year inflation of 9% and a temporary decline in stocks of 13% don't sound that bad when you factor in these long-term returns.

   Below is one of my favorite charts of the S&P 500 index which shows the intra-year declines (red dots) and where the index finished each year (gray bar) going back to 1980.  It shows that despite intra-year average declines of 14%, the index finished positive in 32 out of the last 42 years.  The average annualized return during this time period was 9.4%.  It is important to note that this chart does not include reinvested dividends and does not account for new contributions made at lower prices along the way.  If these two factors were considered, the returns would be even more pronounced. 


       Now to number three: some silver linings.  It's hard not to be overwhelmed by negative headlines like high inflation, exploding national debt, Federal Reserve hiking interest rates, yield curve inverting, the war in Ukraine, and the list goes on.  Every talking head has a probability percentage for a global recession this year, next year, and the next.  It happens every time the stock market swiftly declines more than 10%, or into "correction territory".  Let's take a big step back from all the negative sentiment and look at some positives:

The U.S. economy is growing.  The quarterly reports of GDP, which track year over year economic growth, are coming in positive with the next report coming out this Thursday.  68% of the GDP number comes from consumption of goods and services which is likely to continue to grow given a strong job market, rising wages, and households generally in good financially shape.  Another 13% comes from business investment which looks strong as businesses spend to increase productivity in this inflationary environment and keep up with demand.  In short, the economy looks to continue growing in 2022, albeit not as fast as the rate of change in 2021 compared to 2020.

U.S. Corporations are reporting strong earnings. Last year the companies that make up the S&P 500 earned more than they ever have and 2022 earnings are expected to be close to 10% higher than in 2021.  Corporate profit margins are currently over 12% for the first time since 1940 when data was first recorded. 

Stocks are getting cheaper.  Prices are falling while earnings are increasing.  Since 1974, the S&P 500 index has gone up an average of 8% the month following a 10% correction bottom, and has risen an average of 24% one year later.  By the end of this year, we'll hopefully have mid-term elections completed, lower inflation, a resolution in Ukraine, and supply chains that are working again.  We can only fully participate in the long-term growth that stocks have provided by staying fully invested through these volatile times.  That's part of the sacrifice.

Investors seeking income.  The majority of this newsletter has been focused on the S&P 500 which is an appropriate investment benchmark for growth oriented investors with a high risk tolerance.  Those seeking income that are invested in more defensive areas of the market like Energy, Utilities, Real Estate, and High Dividend stocks have done much better given current market conditions.  Year-to-date, Energy is up 35%, Utilities up 2.5%, Real Estate Investment Trusts down 7%, and High Dividends down 2%, as measured by their respective Vanguard Exchange Traded Funds.  Higher interest rates also mean higher yields for bond investors, although these yields are still in the 2-3% per year range.

My message is simple: Stay calm, avoid panic selling, and let the market perform its magic.  Discipline and patience pay off handsomely over time.

Justin Burgess
Investment Advisor Representative
Text or Call: 910-612-4060

Thank you for trusting CIM with your investment and retirement planning needs.
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