There are a few events in life which you will always remember. Births, deaths, and marriages are just a few examples. I am fortunate to share, Katie and I recently experienced one of these memorable life events.
We are excited to announce the arrival of Charlotte Ann Zeches who was born on August 7 at 7:18 AM. She weighed 7 lbs. 15 oz and was 19.5 inches tall. Both she and Katie are doing great. She also has one very proud and protective brother in Francis.
As a new family of four we are learning new routines and making memories to last a lifetime.
With the arrival of Charlotte, we have also had some homework of our own which affects many areas of our own advanced planning. While still at the hospital, I added Charlotte to our health insurance. Only after getting Charlotte’s Social Security number, did I spend the time updating our beneficiary designations. This included our retirement accounts and life insurance. Even though our own estate plan was completed after Francis was born and accounted for any future children, we are now working on updating our estate documents to specifically include Charlotte.
All these updates did not happen overnight and have taken some time. That is why you have heard us say that our Advanced Planning process for ourselves and our clients includes a step-by-step approach. We want you to complete one step of the plan before moving to the next step. Through our over fifty years of combined experience, we know making changes or updates can seem intimidating and when something is intimidating, people procrastinate. Therefore, we want to do everything we can to try and help you make the changes as your life changes.
Over the past few weeks, we have talked to many individuals and the two most common discussions focus on inflation and can the market continue climbing at the pace it is currently growing. Today, I wanted to focus on the market and the current growth we are seeing.
As Sir Isaac Newton famously spoke, “What goes up, must come down”, this is certainly true as it relates to gravity and somewhat true as it relates to the equity markets. If I had to simplify Newton’s quote for the markets, I would say when the market goes up there are also times for pullbacks, corrections and ultimately bear markets. Last month I mentioned the typical trading year brings several 5%-plus pullbacks and potentially one correction of the 10% variety. As of today, we have not had either this year. Bear markets are routinely known as prices decreasing over 20% from recent near-term highs. We are not far removed from the most recent bear market as this occurred in March 2020 at the beginning of the COVID pandemic. Historically, bull markets (an increasing market) last longer than bear markets (a decreasing market). So, while we agree with Newton, where we disagree as it relates to the markets, is we believe pullbacks and corrections are a normal and healthy part of a correction.
Below are some of the questions we have received:
Since March 2020, equities have gone too far too far fast, how can this continue?
- 2021 has been an amazing year for stocks, with the S&P 500 up approximately 20% for the year without so much as a 5% pullback. Additionally, it has made over 50 new all-time highs so far. To put in context how rare this is, only 1964 and 1995 saw more than 50 new highs before August was over. In fact, the all-time record for new highs in one year is 77, set in 1995, and this year is on pace to come very close to that record.
- What should investors do now? One of the common bear worries is stocks moving up a lot means stocks will come down a lot. That simply isn’t true, fortunately. In fact, as [Figure 1] shows, when the S&P 500 is up more than 15% year to date at the end of August, the final four months have been up the past five times, with the last three up 9.6%, 7.9%, and 10.4%, respectively. In fact, the average return in the final four months after a great start to the year is 4.2%, with a very impressive median return of 5.2%. Both numbers are above the average, and the median return for all years during the final four months is 3.6%.
The Federal Reserve has injected so much money into the system, what is going to happen once they slow down their asset purchases?
- According to recent investor surveys, equity and fixed income investors are worried about a potential “taper tantrum” when the Federal Reserve (Fed) starts to reduce its bond-buying programs. As a reminder, in 2013, Fed Chairman Ben Bernanke casually mentioned that the Fed would start to reduce (taper) its bond buying programs in the coming months. His comments caught equity and fixed income investors by surprise and both markets reacted negatively—although the equity markets went on to return 30% for the year. While we are in a similar situation today with the Fed ready to announce its intentions to taper its bond buying programs, the markets have no reason to be surprised. The Fed has been communicating its intentions to eventually taper bond purchases for several months now. Markets should be well prepared at this point as the Fed learned its lesson from 2013 and has done a much better job communicating its intentions.
- Additionally, we think we are still several years away from full monetary normalization. After tapering ends, the Fed will likely wait some time before it starts to raise short-term interest rates. The last time we were in this position (in 2013), it was two years before the Fed began to increase interest rates, which took place over a four-year horizon. Former Fed Chair William McChesney Martin famously quipped that the job of the Federal Reserve is “to take away the punch bowl just as the party gets going.” We don’t think the current Fed is going to take away the punch bowl anytime soon and expect it will remain accommodative for the foreseeable future.
Washington is going to find a way to mess things up, what can we do?
- Since the beginning of the country, Washington has loomed large on the horizon. Every four years there is the potential for a new administration with new ideas and new pet projects. This year is certainly no different.
- Speaking broadly, we don’t think Washington policy developments are a serious threat to broad markets in the near-to-medium term. We know that people get passionate about policy and that’s a good thing—that’s what makes a democracy go. But a direct connection between policy and broader market direction is rare. Even when it comes to the narrow impact of policy on an individual sector or industry, the outcome for markets may not be in line with what conventional wisdom expects—or may be overwhelmed by larger economic forces.
- Policy does matter, but unless there’s a glaring mistake, it’s unlikely to be a policy decision that takes the bull market down. President Biden’s agenda is likely a mixed bag for markets. Markets tend to respond positively to stimulus, and we believe we may see trillions in new spending, spread out over about 10 years, passed by the end of the year. As previously mentioned, higher taxes could be a headwind, and that additional spending may be paid for, in part, by new taxes (personal and corporate) with the rest coming through borrowing. However, we still believe the primary driver of the recovery will continue to be businesses looking for better ways to compete, innovate, and grow. Businesses are a powerful force, and market history says compared to that what happens in Washington, it is usually not enough of a catalyst to reverse market momentum.
So, again we are positive on the markets, however, this does not mean a healthy correction will not occur. Rather we do not believe the Federal Reserve or Washington will cause the market to enter a bear market. We think there is still room for expansion, but as always, we must stay true to one’s investment objective and time horizon. As we know, the past is not a guarantee of the future, but it can certainly be used as a guide.
As we enter a long Labor Day weekend, I hope you continue to find joy in your life, and I look forward to talking with you soon.
Chris