Control

Written by Brian Cayon, CFA, CPA, Partner & Investment Advisor at Fortress Planning Group

This past weekend I was at my daughter’s volleyball game and noticed this poster hanging on the wall outside of the gym at Waukesha North High School …

I’m sure we’ve all heard a similar message at some point in our lives. Having spent my entire career in the financial services industry, I naturally reflected on this and considered how it might apply to all of us in our investment and financial planning. When it comes to our finances, there are a host of topics that are completely out of our control: the Fed, stock market volatility, the economy, inflation, interest rates, and the list goes on. Unfortunately, these are the things that investors (myself included) spend most of their time worrying about.

But what about the things we can control? My favorites from the picture above are “My thoughts and Actions,” “What I give my energy to,” and “How I handle challenges.” Investors are quite often confronted with challenges, and how we respond to them might mean the difference between success and failure in an investment plan. After all, we’ve heard about the pitfalls of letting fear and greed take over our decision-making process, especially when it comes to investing. So, the message is simple – spend less time focusing on the things we have no control over and more on the things we can control.

Oh, if it were only that simple. Of course this is all easier said than done, right? And maintaining focus is not any easier when you consider the seemingly endless parade of dire news reported by the various financial news outlets. On Thursday morning, just after the release of a hotter-than-expected CPI report, I made the mistake of watching CNBC with the volume up (I usually leave the volume muted). Judging by most of the commentary that morning, I would have believed that financial Armageddon had arrived. I’m sure most viewers felt the same way and would be very surprised to know that the stock market has essentially gone nowhere over the past few weeks. Here are some of the closing prices of the S&P 500 Index these past few weeks:

9/30 3585
10/11 3588
10/12 3577
10/14 3583

So, the market has barely budged over the past couple of weeks, but that’s not the impression one would have gotten from the media. Now imagine an investor watching that Thursday morning program decided to sell out of their stocks that morning when the stock market opened down over 2%. While there might have been a very brief sigh of relief, they would have been horrified to see that the stock market reversed later that morning and went on to close with a gain of more than 2.5%!

Unfortunately, “shock and awe” reporting is what brings viewers back. I can’t imagine that the following fictitious headline would create repeat customers:

“Stocks decline, reasons unknown; May be nothing more than the random fluctuation of a complex system.”

But that’s where we come in, to provide balance. There’s no denying that we are in challenging markets and 2023 has offered nowhere to hide. Aside from cash, nearly every asset class has suffered steep declines. But we are seeing a lot of signs that the tide is turning. Pressure has been easing in commodities. The tight labor market is showing progress. Sentiment is persistently low and there’s mounting evidence that inflation is collapsing in a lot of areas. The main reason that CPI came in hot last week – shelter – may soon be heading in the other direction. And though it may seem like there’s no good news on the horizon, we have history on our side. Consider that since 1932 (post Great Depression), the S&P 500 has only had four (4) calendar years where it declined by 20% or more. Only 4 out of 90 years! If the market ended this year (2022) at current levels, this would be calendar year number 5. Now for the good news - the average return for the S&P 500 in the year that followed each of those 4 instances was 30.9%, with the smallest gain being 26.5% (2009).

Declines are painful to endure when they happen, but as you can see, they don’t happen often. Fortunately, these declines often reset expectations and, more importantly, valuations, which paves the way for higher-than-average future returns. And there’s no reason to expect this time to be any different. Things are likely to remain choppy in the near-term as challenges remain, but we will handle those challenges and continue to provide you with valuable insights along the way. Thank you for the trust that you have placed in us!