Bear Markets, Inflation, Political Gridlock

As we’ve written in the past, there’s always a reason not to invest, and these times are no different from days past. That last part can be hard to swallow but the simple truth is these challenges we are facing in our country and our markets are old as the country itself. That isn’t meant to imply you shouldn’t take them seriously - but you shouldn’t fall into the trap that “this time it’s different” and you should sell everything and hide your money under the mattress.

Let’s take these issues one at a time.

Bear Markets - they occur on average every three and a half years or so. They last on average 289 days and recover in about 19 months although the last three recovered much more quickly. ¹  They are a naturally occurring feature of capital markets and can offer a great opportunity for long-term investors to buy stocks “on sale” as Mr. Buffet likes to say. One possible way to protect your portfolio against bear markets in a cost effective manner is to broadly diversify your holdings. Strategies claiming to protect you on the downside have a cost associated with them. That doesn’t necessarily mean you shouldn’t consider them; just be aware that the cost of that protection directly offsets any gains you will receive in a bull market and in many cases, simply doesn’t work as advertised.

Inflation - this is a hidden tax on consumers and investors alike. Your returns and buying power are eroded by inflation. Even gains in wages, typical during these periods, lag inflation. While there are a number of factors that influence inflation, the primary driver is the printing of money. This results in more money chasing fewer or the same amount of goods and services causing an increase in prices. It’s one of the first lessons you learn in economics class. Add to this the supply chain issues from the pandemic lockdowns, and the war in Ukraine’s effect on energy prices (that had already been steadily increasing for two years) and you have high inflation and likely, a recession. 

Political Gridlock - the older I get, the more common this appears. However, I fully understand it when young folks feel frustrated about gridlock. The fact of the matter is that gridlock is nothing new in Washington. Sure, it’s worse in some time periods than in others, but there are plenty of examples of severe differences between the two major parties throughout our country’s history.

The lessons are clear to those of us that have invested over a significant time period, in my case the last 40 years. Keep costs low, be tax-aware, stay diversified, and stay invested! In fact, from December 1978 through April 2022, the MSCI World Stock Index has returned 11.05% on average. This is the return investors can achieve if they can withstand the market’s volatility. Most investors can’t stay the course in a 100% stock portfolio so bonds and cash play an important role in keeping investors from selling at the worst possible time (like today!). But the stock portion of your portfolio can achieve these returns simply by staying invested. Focus on those factors you can control; taxes, costs, risk, and especially the financial plan you and your advisor have worked to create. Sticking to this plan is your roadmap to being a successful investor. 

S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.

1. Source: Ned Davis Research, 12/21. Time period referenced is 12/16/01–12/15/21.

Important risks: Investing involves risk, including the possible loss of principal. • Diversification does not ensure a profit or protect against a loss in a declining market. This material is provided for educational purposes only. Hartford Funds Distributors, LLC, Member FINRA.

Apella Capital, LLC is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered or excluded or exempted from registration requirements. Registration with the SEC or any state securities authority does not imply any level of skill or training. No one should assume that future performance of any specific investment, investment strategy, product, or non-investment related content made reference to directly or indirectly in this material will be profitable. You should not assume any discussion or information contained in this email serves as the receipt of, or as a substitute for, personalized investment advice. As with any investment strategy, there is the possibility of profitability as well as loss. Apella Capital, LLC does not provide tax or legal advice and nothing either stated or implied here should be inferred as providing such advice. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Diversification seeks to reduce volatility by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market.