Consumers and investors tend to abhor recessions and bear markets. The media, on the other hand, almost always adore them. The reason, of course, is ratings. The more dramatic the markets, the more people tend to tune in. During the long bull market, the media tried desperately to keep readers engaged. “Stocks are at an all-time high. Here’s what stopped the last 12 bull runs” (CNN, April 23, 2019) “The 40-Year Bull Market Still Has Room to Run. Here’s Why” (Barron’s, March 12, 2022) Headlines like these may have lured in a lot of eyeballs, but advertising revenue is surely up today amid the rabid headlines about the “vicious” bear market that is nipping at our heels today. It’s a cycle that can’t help but feed on itself. That’s precisely why one of the wisest strategies for maintaining financial stability (and maintaining your sanity!) is to steer away from the media frenzy and focus on the things you can control.
To help, here are three things you can control—even when the financial world feels unmanageable:
Instead of letting the news fuel your own uncertainty, stay focused on your long game. Yes, inflation is flying, prices are rising, and the market is dipping from recent all-time highs. But for investors, recessions also bring a welcome drop in valuations which, in turn, offers a better entry point that drives better forward returns than purchases made at higher valuations. That’s the beauty of market cycles! Focusing on the benefits that come with a recession and market downturn can lift your spirits and, ultimately, your net worth. (For more on this point, see my blog post Inflation, Interest Rates & Your Money.)
If you feel a tinge of uneasiness creeping in, try diffusing your bias by focusing on the here and now. Is it logical to compare today’s market decline, which is being driven by real fundamentals such as company earnings and valuations, interest rates, and economic conditions, to either of those previous environments? Probably not. Though every market cycle is unique, past market recoveries hint that fundamentals-driven bear markets like this one run their course relatively quickly. Historically, bear markets last an average of 289 days (about 9 and a half months). Make that statistic the one that informs your bias moving forward.
One reason a diversified investment strategy is so calming is that it takes advantage of multiple aspects of a changing market environment. For example, rising interest rates make fixed income attractive from a risk-return perspective—such as when the 1-year US Treasury crested to 4.00%, offering an essentially risk-free investment (that was also state income tax-exempt). Diversification also takes advantage of the drop in the price of equities—especially when a company’s Price to Earnings (P/E) multiple falls, which indicates how expensive the stock is relative to the tangible earnings the company is producing. On December 31, 2020, the S&P 500 had a relatively high forward P/E of 27.15. By August 31, 2022, it had dropped to 17.44. This change creates a better buying opportunity for investors because the lower forward P/E makes forward returns expectations much more attractive than they have been for years. Sticking to your diversified investment strategy can help make the most of today’s market without exposing you to a higher degree of risk. It’s one of the easiest ways you can control your financial strength once the market tips skyward once again.
Over the past 20 years, our team at LCM has guided our clients through some of the toughest financial environments. By helping you to consistently make rational decisions in the face of market turmoil, we work to help you maintain financial stability and achieve your long-term goals. Our advice today is to do your best to ignore the media frenzy and focus on what you can control. If you need more guidance along the way, we are always here to help.