Blog post #490
Market and Financial Thoughts – Late Summer 2021
This year has been strong for most asset classes and stock indices. Despite the ongoing pandemic, most major US stock market indices are within a stones-throw of their all-time highs. This shows that markets are driven and highly correlated to earnings and future projected earnings.
Should current stock levels change your current or future investment perspective?
We think the answer is no. We do not believe you should change your long-term investment policy just because some US market indices are near their all-time highs.
What is our view of the current markets and what is our outlook?
While no one can accurately predict what will occur in the next few weeks, months or years, there are strong reasons to remain rationally optimistic for remaining invested for the long term.
As we discussed in our blog post dated April 29, 2021 (Investing at Market Highs), historical financial data shows that when the S & P 500 has reached highs in the past (for data from 1926-2018), the S & P 500 went on to provide positive average annualized returns over the one, three, and five years following new market highs. And those returns were significant, averaging over 14% during the subsequent one year and around 10% over the subsequent three and five-year time periods.
This means that even if certain stocks or sectors may seem high, there is solid justification, based on historical financial data of almost 100 years, that new market highs today are NOT a sign of negative returns to come over the next 1-5 years, on average.
While some asset classes may be at high levels, other asset classes may not be over-valued or have valuations which are significantly below the valuations of US large stocks. This is where our discipline of broad diversification and planning can benefit you.
While we are optimistic about the long-term, there are always issues that confront financial markets and investors in the short-term. Here are some issues that will be discussed and analyzed over the coming months:
- Will interest rates rise? When and by how much?
- What will happen with inflation in the coming months and years?
- How and when will the Federal Reserve change their very accommodative policies that have been in place due to the pandemic?
- Will tax increases be passed by Congress, and if so, what will the new income and capital gains rates be?
- What will happen with the pandemic and the Delta variant, in the US and globally? How ill that impact various companies and economies?
We do not have a clear crystal ball to be able to confidently answer these questions. The economy and the future cannot be accurately forecast and financial markets (stocks as well as interest rates) cannot be timed. We know that our philosophy of not developing our investment strategy by trying to make predictions about issues such as these has remained consistent and disciplined since we founded our firm in 2003.
We strive to develop a financial plan and individual asset allocation policy for each client, based on your personal circumstances. If one of these topics (or other type of change) impacts your specific situation, we will address that as the issue becomes clearer. We don’t develop financial policy based on outcomes that are unknown.
One of the key concepts we want to stress relating to stocks: declines are temporary on the long-term upward trend of stocks.
There has not been a decline in US stocks of 10% during 2021, and even in several months prior to that. That is not normal. We want to remind you about the expected volatility that is normal with investing in stocks. While we cannot predict when the next decline will occur, we know it will happen at some point. We want you to be mentally prepared for a such a decline, so you will continue to maintain your appropriate stock allocation.
You should expect in most year’s there will be a decline of around 10% in stock values, from an intra-year peak. This does not mean that the full year will be negative, it just means that at some time during most years there are declines of around 10% and then recoveries. This is the normal volatility we must endure to reap the longer-term rewards of investing in stocks.
There are periods of major market declines of 30% or more, usually every 3-5 years, since World War II. These may be fast (as occurred in February – March 2020 at the onset of Covid) or take a few years to go down and many years to recover. These major declines are normal and should also be expected.
If you can handle the volatility, the positive news is that you don’t need to be able to time the financial markets to have a good investment experience. Over time, capital markets have rewarded investors who have taken a long-term perspective and remain disciplined in the face of short-term noise.
By focusing on the things you can control (like having an appropriate asset allocation, being diversified and managing expenses, turnover and taxes), you can be better positioned to make the most of what global stock markets have to offer.
We hope that information like this, as well as our other guidance, can provide you with a greater sense of security and comfort in dealing with uncertainty and all types of market conditions.
Talk to us. We want to listen. We want to assist you, your family members and friends.
If you would like to read our previous blog posts, click here.
Let us know what you think. If you would like to contact us, please email or call Brad Wasserman (firstname.lastname@example.org) or Keith Rybak (email@example.com); or 248-626-3900 (or visit the Contact Us section of our website).
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Wasserman Wealth Management, 31700 Middlebelt Road, Suite 130, Farmington Hills, MI 48334