After experiencing drawdowns of 21%, 25% and 35% in the 2022 bear market, the Dow Jones, S&P 500 and Nasdaq 500 all broke even on a total return basis this week:
Sure, this means these markets haven’t gone anywhere for about two years, but just look at the returns since the start of 2020:
Considering that everything we experienced during those returns isn’t bad at all.
One of my least favorite phrases in all of investing is… Easy money has been made.
Making money in the financial markets is never easy.
You are forced to deal with constant uncertainty, volatility, fear, greed, and an endless stream of noise.
It only feels easy in the rearview mirror.
Just think about everything investors have had to deal with over the past few years:
- The pandemic shut down the economy for a month or two in the spring of 2020.
- The unemployment rate rose to 14%.
- We had no idea how long the pandemic would last or when we would find a vaccine.
- March 2020 was one of the worst months in the history of the stock market.
- Interest rates fell to historic lows.
- Oil prices became negative.
- We have seen the fastest bear market from all-time highs to an all-time 30% decline.
- Then the stocks went back up.
- There was a stock/crypto meme bubble.
- Inflation has come back from the dead, reaching its highest level in 40 years.
- We had a bad bear market in 2022.
- The Fed hastily raised short-term interest rates from 0% to 5%.
- The bond market experienced its worst collapse in history.
- The 60/40 portfolio had one of its worst years ever.
Over the past two years, investors have been awash in predictions of a recession, a repeat of the 1970s, stagflation, a housing market collapse, and worse.
None of these things happened.
It’s incredible how well things have worked out in the last few years all things considered. There are no counterfactuals but things have turned much worse.
Yes, the financial response from the government was tremendous, but it was not a sure outcome that it would work. Certainly no one expected this economic outcome ahead of time.
This was an economical experience unlike anything we had tried before.
Inflation was no fun dealing with, but things could have been much worse considering Russia invaded Ukraine when prices were already out of control. Inflation would have been even more troublesome than it was if the global supply chain had not recovered in a relatively short period of time.
The Fed could have broken things up when it raised interest rates from 0% to 5% so quickly. The reason many economists and pundits are predicting a recession in 2022 and 2023 is because we have never succeeded in bringing inflation down from such great heights without economic contraction.
If you injected Jerome Powell with a truth serum, I think he would tell you that there is no way a soft landing will be possible for 15 to 18 months.
The fact that we have done so far is an economic miracle.
We may enter a recession or another bear market in 2024, 2025 or whenever. It’s bound to happen at some point.
Regardless of how things turned out, I would like to applaud those who stuck to their investment plan throughout this ordeal.
If you faithfully did dollar-cost averaging when stocks were falling, give yourself a pat on the back. You did the right thing.
If you rebalance your portfolio when stocks decline, that’s a great job.
If you can ride out the losses without panic selling at the bottom, good business.
If you ignored the people who were screaming at you every day about how bad things were going to get, it was a great performance.
If you keep your asset allocation where it is when people on the Internet are trying to offer you ridiculous investment options, good for you.
If you haven’t looked at your 401k balance in the past two years, you’d better do so eventually.
If you’re not doing anything for your wallet because that’s what your plan called for, I applaud you.
Look, the clock never runs out in the markets. The game never ends. Bull markets turn into bear markets turn into bull markets and round and round.
Everything is cyclical.
There will be harder times ahead at some point. There will be crashes that make the bear markets of 2020 and 2022 look quaint by comparison.
But sometimes it’s good to sit down and evaluate how you handled certain parts of the course.
Staying on track is harder than it seems.
In-depth reading:
Everyone is irrational