We would like to wish you a safe, relaxing Memorial Day weekend, and a wonderful summer to follow.
Last year, long before this current downturn started, I wrote about the incredible frequency with which we had seen the words “uncharted territory” being bandied about in the financial press.(Uncharted Territory) It seemed like every other talking head made it part of their daily repertoire in vapid attempts to appear profound in their observations about the environment we’re all navigating.
I took the position then that most of those folks were using those words way too blithely, and that they hadn’t given any genuine consideration to what that concept might actually mean. None seemed to contemplate the true level of resolve, determination and tolerance for ambiguity that successfully traversing that kind of reality might actually demand. Now we’re starting to see.
Back then I drew a parallel with the Lewis & Clark expedition to illustrate my point. I invited readers to ponder what every member of the Corps of Discovery must have felt in the fall of 1805, seeing the towering peaks of the Rocky Mountains rising directly ahead, and realizing that the “wisdom” they had held onto up to that moment – the assurance that the Appalachian Mountains were the highest in the continent – was totally, massively wrong.
Think about that for a moment. They were thousands of miles deep into a wilderness no person of European descent had ever seen. They had no maps. Despite thorough preparation, much of their gear was ill-suited for the environment they were suddenly confronting. Winter was coming on quickly, and their whole plan had just been upended. And now it was solely up to them – calmly and deliberately – to improvise, adapt, and overcome. (If you haven’t read Undaunted Courage by Steven Ambrose, I’d recommend it – at the very least you can learn how that story turned out.)
Well, here we are now – in a challenging environment full of complexity, uncertainty, and ambiguity that nobody has a map for – and an awful lot of the talking heads who were speaking so blithely last year about “uncharted territory” are now freaking out. In fact, some of the boldest and most outspoken voices we heard back then are now sounding the most breathless and panicked. They’re pointing fingers, shrieking about all the imminent dangers, and setting each other’s hair on fire in reflexive accusations that somebody should have done something different. (Sorry, but I’m pretty sure none of those folks could ever have been chosen for the Corps of Discovery.)
Gloom and anxiety abound. Inflation is running at levels not seen since I was in college. The Fed is determined to master it by tightening the money supply and has made it clear that it will no longer ride to the aid of gyrating financial markets as it has in the past. (And as long-range, goal-focused investors, we should be grateful for that, because long-term inflation has historically been a very destabilizing force in economies and in societies as a whole – the disease is way worse than the cure.)
A constant flow of negative news has sent investors into a psychological tailspin. War in Ukraine, COVID lockdowns in China, on-going supply chain problems, gas prices through the roof, food costs going up, and now this week another horrific mass murder of elementary school kids in our own back yard. It’s hard to find reasons for hope and long-term optimism in the current environment.
This mood is clearly being reflected in broadly followed metrics. The University of Michigan Consumer Sentiment Index has plunged, dropping below 60 recently, a level it has breached only three other times since it was first created in 1978 – and those times were coincident with the worst stages of the Iran Hostage Crisis and crippling inflation in 1979-80; the Great Financial Crisis of 2008; and a sharp and sudden decline in 2011 when Standard & Poor’s downgraded the credit quality of U.S. government debt.
There can be no doubt that we’ve experienced some very unpleasant declines in most asset classes over the last six months, but it’s important to know that numbers like this don’t typically predict further market declines. In fact, they have frequently been contrary indicators in the long run, because they reflect that many investors may have already priced in the sum of their fears about the future.
It’s also important to know that moods and sentiment don’t always reflect the underlying fundamentals, and there is a lot of strong economic activity taking place around us. Planes are packed, hotel rooms are scarce, and airlines and hotel companies have had no problem raising their rates because people are clearly wanting to get out and travel in spite of (or perhaps because of) their anxieties. They may not be buying Peloton bikes or binge-watching Netflix anymore, but American consumers are spending money, and they should never be underestimated.
The job market, too, continues to show record-breaking strength. Despite recent news of layoffs in some tech companies, there are still almost twice as many job postings as there are people available to fill them. Wages are rising as companies compete for talent. This is a sign of on-going consumer resilience that shouldn’t be overlooked.
And maybe, just maybe, we’ve seen some indications this week that the narrative may be turning, and that inflation moving forwards may turn out to be less dire than people have imagined, and that the Fed won’t have to destroy the economy in order to tame it.
But there are no facts about the future. We don’t know how this story ends. That’s one of the immutable truths that makes it so difficult for most people, left to their own devices, to become successful long-term investors. Life is a journey into the unfamiliar and the unknown, and that is scary.
So, in the absence of facts, we’ve always counselled practices like asset allocation, diversification, and rebalancing, along with principles like patience, discipline, and faith in the future. It sounds so simple…
But nothing about following those principles is easy – because patience isn’t true patience unless it gets severely tested. Discipline isn’t real discipline until it demonstrates that it can hold up under significant stress. And faith in the future isn’t genuine faith if it demands upfront proof that principles like patience, discipline, and faith will eventually bear fruit.
As an old mentor of mine was fond of saying: “that’s like standing in front of the wood stove and saying ‘give me some heat, and I’ll put the wood in.’”
Try to remember these two things:
Moods like this is what buying low feels like.
And for every share of stock, or for every discounted bond that is currently being urgently and anxiously sold in this environment, there is somebody out there buying it. And they believe fervently that they are getting a good deal.
Does that mean we can now be confident we have reached the bottom? Certainly not. None of us can ever be certain of that in advance. And the only time we ever will be certain of that will be long after the event has passed, and financial markets will have long since roared upwards – leaving all those waiting for all the bad news to be behind them before they get on board standing forlornly on the platform as the train disappears in the distance.
Because if history is any guide, and it’s the only guide we have, at some point and for no apparent reason, markets will suddenly turn northwards, and the very same volatility that everyone now decries as “risk” will turn into an equally sudden and breathtaking reward for the patient, disciplined, long-term owners of well-designed portfolios.
So stick with those principles, and unless something significant about your overall plan has changed, resist the temptation to react to the anxiety you feel.
“We cannot assure success, but we can deserve it.” – George Washington –
Thank you again for your confidence and trust. If you or someone you know would like to talk through your concerns and your long-range plans with one of us, we would welcome the opportunity. Please reach out and we will gladly set aside the time.
Thomas G. Twombly