Staying Cool Amid the Panic

Good evening:

Many people seem to believe we live in especially exhaustive, volatile times. But the rhythms of our moment – pandemic, protest, pandemic, election, insurrection, pandemic, inflation, invasion of Ukraine, market volatility – are nothing new. As Tom Lee, our head of research, likes to note: There’s nothing new under the sun. This underscores the importance of looking at cycles and recognizing that what has happened could happen again. The adage applies to markets in profound ways, helping us navigate turbulence and uncertainty.

“There’s no excuse for being surprised.”

In the book Of Anger, Seneca draws on Fabius, one of Ancient Rome’s great generals, to teach a lesson from war: “Fabius used to say that the basest excuse for a commanding officer is ‘I didn’t think it would happen,’ but I say it’s the basest for anyone. Thinking everything might happen; anticipate everything.” Anticipate everything is worth keeping at the forefront of your investing approach.

In markets, then, we shouldn’t be surprised by the twists and turns, the inevitable ebb and flow. Raising rates, war, and inflation: Our research heads believe the choppy times will continue. But there is no benefit in panic, even though we just endured the S&P 500’s worst start to a year in its history. Sometimes, the stock market is wobbly. Sometimes, prices decline sharply. Remember, the market goes down roughly:

• 10% once per year or so
• 20% every 5 years
• 30% every decade

The market surged Wednesday afternoon following the Federal Reserve’s decision to hike interest rates by 0.50%. It was its largest move since 2000, prompting the market’s best day since May 2020. For many, Wednesday was a welcome reprieve in volatile times. Yet the next day, the market sold off, and the losses extended into Friday, marking a sixth consecutive losing week for the Dow. Gulp.

We finished April below the S&P 500’s 200-day moving average for the first time in two years. The significance is worth a close look: Higher volatility in both directions. Consider the best and worst one-day returns for the S&P 500 in history: 47 of those 50 best and worst days have happened while the S&P 500 was below the 200-day average. What this means is we could experience numerous selloffs, followed by strong relief rallies, in consecutive days, just as we saw this week. The biggest up and down days tend to be clustered.

Which is why it’s important to stay focused on your plan, without getting awash in the day-to-day fluctuations. Elon Musk recently tweeted: “Don’t panic when the market does. This will serve you well in the long-term.” We’re careful when heeding investment advice from billionaires, but that principle aligns with our approach to evidence-based research. Similarly, Roman emperor Marcus Aurelius emphasized the importance of “ignoring the mob,” and warned of blindly following consensus view.

Greek Stoic philosopher Epictetus, who started his life as a slave before opening his own school of philosophy, taught that all external events are beyond our control. But we are responsible for our own actions. The financial parallel is the macro- and microeconomic events that affect individual companies and their corresponding rising and falling stock prices. How we respond to them, whether we learn from them, is in our power.

This brings us to an observation by our Tom Lee this week:

“For whatever reason, markets seem far more prone to panic today (last 5 years) compared to the 30 years I have been following markets (yup, 30 years peeps). Is this because of: social media? Alternative data/machine learning? Algos? Reddit/Wall Street bets? Not clear.”

All the above, perhaps. It’s a fascinating point from Tom on investor sentiment, confidence, and temperament, but we don’t need to overthink it. We live in an overly saturated news environment. We’re bombarded with opinions and messaging, which amplify the booms and busts, making them more consequential to the real economy. If we don’t filter our social media channels properly, the fodder can disrupt our emotions.

Though we’ve been riding a strong bull market since 2009, a period during which the S&P 500 gained more than 800%, there have been nearly 30 corrections of more than 5% since the March 2009 low. Nine were larger than 10%, three exceeded 20%, and one exceeded 30%. 2020 was the fastest bear market in history.

Downturns are inevitable, yet financial panics occur regularly. Maintaining composure, patience, and fortitude is a requirement to sound investing. To fully reap the benefits of compounding, you need a portfolio you can stick with through the declines. Uncertainty always looms, and we must stomach drawdowns for the best returns. Declines are a matter of when, not if.

Many experts say our panic lies in a fear of the unknown and believing that a dramatic event warrants a dramatic response. Acting during a panic helps us feel in control of the situation. Herd mentality also plays a role: Other people panicking can prompt us to participate in the panic, exacerbating the pain.

Let us revisit a cornerstone of our research approach: The future is unknown. Worry and panic are understandable, but neither is helpful. Successfully navigating the next few months requires charting a middle course, with clear goals and a clear plan. We can do this with the proven, effective tools we already have, while giving in to neither dismay nor dismissal. Remember, the stock market is an incredible mechanism to accumulate wealth over time, but it doesn’t come without risk. Volatility is the price we pay.

We can expect more market craziness until the Fed’s struggle to beat inflation has been resolved. But history tells us that you will do well if you hang in there. Over the long run, this approach has led to good fortune. 

On behalf of our entire team, we wish you a wonderful Mother’s Day weekend.

Health and Happiness, FSInsight Team