2022 Q2 Newsletter
“Oh well, bears will be bears.”
The first six months of 2022 saw the S&P 500 decline over 20% from its all-time high, ushering in, by my count, the seventeenth bear market in stocks since the end of World War II. Remarkably, this included a stretch in mid-June when 90% of S&P 500 components close lower in five out of seven trading days. This is one-sided negativity on a historic scale, so let’s pause a moment to make clear the most urgent and essential point of this newsletter: Selling one’s quality equity portfolios in the midst of a bear market has historically been the best way to completely destroy any chance for lifetime investment success. But to sell when investor sentiment is sufficiently negative to drive 90% of S&P stocks lower on five out of seven trading days—to sell, that is, when everyone else appears to be selling—strikes me as the height of foolishness. With that clearly on the record, let me attempt to make sense of what is going on here.
From its Great Recession trough on March 9, 2009, the S&P 500 compounded at 17.6% annually through the end of 2021, bringing it up nearly seven times from its low. (Imagine $1MM growing to $7MM in less time than it took your daughter to move from kindergarten to her senior year). This was one of the greatest runs in the history of American equities. But when inflation soared late last year, it became evident that some important portion of equities’ jaw-dropping advance had been fueled to a great extent by an excess of fiscal and monetary stimulus, initially mounted to offset the economic devastation of 2020’s COVID-19 pandemic. To put it bluntly, the Federal Reserve created far too much money and has left it sloshing around out there for far too long.
Since inflation is always and everywhere a monetary phenomenon, we investors now find ourselves having to give back some of our extraordinary gains as the Fed moves to sop up that excess liquidity by raising interest rates and shrinking its balance sheet. (This has turned the aforementioned $7MM into “only” $5.6MM). While it is true the war in Eastern Europe and ongoing supply chain woes have exacerbated things, in my judgment, those are only irritants: monetary policy (seasoned as well with too much fiscal stimulus) got us into this mess, and monetary policy must now get us out. The fear ringing through the market now is that the Fed will overtighten, putting the economy into recession. So be it. If an economic slowdown over a few calendar quarters is what it takes to stamp out inflation, it would be the lesser of the two evils by far. Inflation is cancer to us real-world consumers, and it must be destroyed.
Not surprisingly, our investment policy has not changed, because it never does. Namely, we are still long-term, goal-focused, plan-driven equity investors. We still fund our plans using globally diversified portfolios containing over 13,000 of the world’s best companies, managed by the world’s top executives. And since these astute people have demonstrated a remarkably consistent ability to increase the earnings, dividends, and shareholder value at the companies they run, regardless of macroeconomic conditions, we still Ignore the Noise.
As such, we will continue to act within the context of our financial and investment plans, choosing NOT to react to current events, no matter how distressing they may get. After thirty months of chaos—the pandemic, the election that would not end, roaring inflation, the supply chain mess, the war in Europe, and so on—you may be feeling a bit exhausted. Although this is perfectly understandable, that is precisely when the impulse to capitulate becomes the strongest, and when it must be resisted most strongly. So we are here to remind you that Panic Is Forbidden at DEM for we know that This Too Shall Pass.
That said, we are here to discuss this with you at any time and show you exactly how your specific plan is built to sustain not only this bear market but the many that will inevitably emerge during our journey together as lifetime equity investors.
Once again, thank you for being our clients. It continues to be a privilege to serve as your family’s trusted advisor. And we wish you nothing but joy and happiness with those you love this Fourth of July weekend.
Senior Portfolio Manager
Disciplined Equity Management
Plan Appropriately, Invest Intelligently, Diversify Broadly, Ignore the Noise