And Now...For Some Good Bad News

October 03, 2022
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Do you want the good news or bad news first?

How about both? At the same time.

The stock and bond market are down considerably. Even supposed inflation hedges like gold are down year to date. CNN’s Fear & Greed Index is at extreme fear levels. At the time of this writing, on a scale of 0 to 100, it’s at 14.

Add to this the above chart which shows that US Investor sentiment is reaching bearishness rarely seen in the last several decades. Since the turn of the millennium, the only time it’s been higher was in 2009 during the Great Financial Crisis. Fun fact: right now (not then) is the only time it has been over 60% two weeks in a row.1 Ick!

You may be thinking, how is this good news for investors?

Here are a few reasons:

First, market environments like this are opportunities for investors to practice the “modest” goal of tested investors like Warren Buffett: greed over fear. In 1987—back when the S&P 500 was around 284 (now it’s well above three thousand points higher)—Buffett wrote,

 

What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.2

 

Second, the good news is that the bad news in the stock market can bring opportunity for reward.

When investor sentiment has been this low in the past, the S&P 500 has been up an average of more than 30% percent a year later (a median of 24% higher).3 Furthermore, we are entering what has been the best season of the stock market over the last decade. The next three months of the year have historically had the best performance for the S&P 500 featuring a median gain of 7.86%.4 Sure, ten years is much too narrow of a window to be preaching market stats, and now we are in a much different time of quantitative tightening instead of easing. Still. The last quarter of the year is historically the best time of year for the markets, and nearly twice that of the next best quarter.

Of course, none of this guarantees the future, nor does it mean the market will resume its uptrend pronto. There are clearly many challenges. It does mean, however, that we have data to work with and seasoned investors to learn from.

History has shown that younger investors especially should be drooling at a falling stock market. Big money can be made over long periods of time from big dips.

You may think, “I’m not young. My portfolio is destroyed.” Not necessarily. As one financial planner put it, “All the potential of your portfolio remains. Assuming you didn’t panic sell, you still own all the shares and are likely reinvesting dividends at lower prices.”5

You probably shouldn’t sacrifice potential on the altar of panic.

Know someone panicking? Know someone who is only focused on the bad news? Know someone who hasn’t talked to their advisor in some time?

Send them our way.

If you can only see the bad news right now. If you are tired of watching stock markets drop and interest rates rise. Take a break. Get off social media. Turn off the television.

Treat yourself to something stable. Something that the owner of a very popular company recently said would not go up. Grab the All-American Lunch—a hot dog and a soda—from Costco for a buck and a half.6

See? I told you I had good news.

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Sources: 

  1. https://twitter.com/bespokeinvest/status/1575469376039534594
  2. https://www.berkshirehathaway.com/letters/1986.html (Emphasis added).
  3. https://www.carsongroup.com/insights/blog/two-reasons-not-to-lose-faith/
  4. https://twitter.com/bespokeinvest/status/1575099795940999168
  5. https://blairbellecurve.com/after-the-harvest/
  6. https://www.youtube.com/shorts/cKma3_PyQj8