Here we are at the end of Julius Wealth Advisors' full second quarter. Before I go any further, I’d like to thank our current and prospective clients for joining and continuing this journey together. I look forward to sharing more knowledge and doing so with passion and integrity. While building long-term trusted relationships along the way.
As much as I wish it were otherwise, it seems the market does not share my positive sentiment. Over the last few months, we’ve been watching a bear market in decline. Inflation is at a 40-year high, and the Fed (for those of you playing at home, this is the Federal Reserve) is aggressively hiking interest rates. As parts of the world often do, they seem to be following suit by showcasing similar trends. Combining these factors with the US political climate and wider geopolitical events can paint a fairly bleak picture at a glance. This sentiment showcases more of the psychological side of wealth, rather than the numbers side.
If you’ve listened to my podcast read any of my blogs, or simply spoken to me, you’ll know that I don’t take the “glance” approach when it comes to wealth. As I often tell people, “numbers don’t lie, people do.” Throughout my life, and especially during my time on Wall Street, I have so sadly watched people take the short-term emotional quick fix vs. playing the long-game.
While the events of today, however alarming to some, aren’t isolated when you add some context. As Mark Twain stated - “History doesn’t repeat, but it often rhymes.” So, has history rhymed prior? This past quarter, I have been thinking a lot about this quote and looking through data to see where history may be rhyming.
During the 70s (no I won’t point out how long ago this was) we actually experienced a similar economic climate. I specifically hone in on 1974, when CPI (inflation measure) was at 11.1% due to a rise in the price of oil and other commodities, Nixon resigned leaving an unstable US government, Turkey had invaded Cyprus, the UK and Global inflation was also high. Sound familiar?
While we can’t predict the future, we can use history to give us some idea of what may happen in similar circumstances. You may be surprised to learn that despite the events of this single year and high inflation during the years surrounding it, the S&P 500 was only down for 4 of 15 years during the 70’s and early 80’s. You can read all about it in my most recent blog. Additionally, in 1974 the S&P 500 was down 26.5%, eerily similar to the ~23% decline we have recently experienced. Just to see a rebound of 37.2% and 23.8% the next 2 years!
The point here is that despite the alarm, things may not be as bad as they seem. For starters, we’re already starting to see signs of recovery. For example, commodities and the housing market have started to cool, which should start to cool inflation. This is because markets are self-discounting mechanisms. By their very nature, they aim to correct themselves. When things get too high, things shift to bring them back down. The reverse happens during lows. “The invisible hand” doing its work!
In a free-market economy, humans tend to adapt to their given circumstances. We change our habits based on what's going on in our lives. If things get too expensive, we stop buying them, and/or search for more affordable substitute products. Thus, the laws of supply and demand come into play…however, things can take time, which is where the short-term nature of market participants can be to your advantage, if you play the long game!
To this point, based on recent consumer sentiment indicators, people are more negative now than they were during any point in the history of these measures. In my opinion, this is due to what is known as Anchoring Bias. This is when people anchor themselves and their response to the most recent outcome of an event. When it comes to the market, it leads people to believe that things will play out as they have before - despite history's typical inability to “rhyme vs. repeat” itself.
In this case, I am speaking of The Great Recession. While Covid-19 was technically a recession, the financial ramifications for many weren’t that long-lasting (if anything, they were fruitful, which is causing the recent bout of inflation). Thus, the most recent outcome of a recession was the devastating effects of The Great Recession. I will not rehash all these effects, but I will state that I do not believe the events of today are the same as the events of The Great Recession. The root cause of this was the lackluster lending standards, and leverage in the banking system. Banks gave bad loans and didn’t have enough capital which caused the collapse of the market. Like it or not, the banking system is the heart of the global markets functioning properly. As witnessed by the data below, some of the largest US banks are much healthier today than they were at the start of The Great Recession in 2007:
What we’re experiencing today is problems with inflation caused by supply and demand, that is the "rhyme" not the "repeat." What these events do have in common is that they’re causing people to sit on their hands when it comes to their money. I encourage you to look at these events a little differently. Here at Julius Wealth Advisors, we often talk about investing in the best businesses. Despite how good these businesses may be, they will be feeling the effects of the market today - albeit most likely to a much smaller degree than their weaker counterparts. This deters people from investing, thinking they should wait till things settle down.
Take the “Black Friday” approach instead. During Black Friday, retailers sell some of their products at crazy discounts, offering a huge opportunity to save for consumers. So, when the best businesses effectively go on sale, why do investors take the opposite approach?
Staying out of the market now is like waiting until these items are no longer on sale, and buying them at full price. Markets are down, which means that quality investments are on sale. By the time the market corrects itself, this chance will have disappeared.
Wealth, like a lot of things, comes down to playing the long game. One way to look at the quarter that has just been is that it’s a time for concern, skepticism, and hesitation. Another way to look at it is a window of opportunity. The businesses that you shied away from due to their high price are now affordable and endeavoring to recover as quickly as possible.
The long game often feels lonely, especially in today’s instant gratification society. From my experience the true winners play it. For those who have started with us, thank you, for those who haven’t, we’ll be here playing the long game once you say "put me in coach, I'm ready to play!"
Jason Blumstein, CFA®
CEO & Founder
Julius Wealth Advisors, LLC
This piece contains general information that is not suitable for everyone and was prepared for informational purposes only. Nothing contained herein should be construed as a solicitation to buy or sell any security or as an offer to provide investment advice. Past performance does not guarantee any future results. For additional information about Julius Wealth Advisors, including its services and fees, contact us or visit advisorinfo.sec.gov.