Investing in UncertainTimes
as a fall of at least 20% from the most recent high price. During those periods, the best part of the next bull market happens early in the cycle. The first year of the new bull market has averaged 40% and the second year has averaged 13%. Bear markets drop 36% on average, but average bull market rises 114%. Bear markets are where bull markets are born. when consumer sentiment is low, as it has been recently. As measured by the survey conducted by the University of Michigan since 1971, the consumer sentiment hit a recent low in July. While past performance is no guarantee of future results, the average return in the 12 months after the low point in the cycle is 25%. In addition to bear markets, long-term investors have also seen strong gains Whether it’s stocks trading at a discount to recent values or the fact that they are in bear market territory or that consumer sentiment is at cycle lows, these are all signals that long- term investors look at as opportunities to hold their positions, rebalance to make sure they are properly allocated for the next bull market or perhaps, even increase their risk profile to take advantage of stocks at lower prices. It may seem daunting or perilous to take a bullish stance in the middle of a bear market. However, that is when successful investors create their best returns - buying low and looking long-term.
This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment. “Alera Group Wealth Services” is a brand name utilized by Alera Group, Inc and certain subsidiaries and affiliates (collectively “Alera”). Advisory Services offered through Alera Investment Advisors, LLC. Information provided by Alera should not be considered tax or legal advice. Should you require tax or legal information, please consult your tax advisor or attorney.
Written and prepared by: Robert Janson, CIMA®, AIF® Senior Vice President, Senior Portfolio Manager, Wealth Services
Investing in uncertain times can be very daunting. What about inflation? What about the mid-terms? What about rising interest rates? What about the recession? Many investors are concerned and confused about how the headlines will affect their portfolios. Successful investors have learned over the years that when uncertainty is heightened and the sentiment is low, patience is needed, and opportunities are plentiful. This year, as the Federal Reserve continues to aggressively increase interest rates to gain control over inflation, both the stock and bond markets have had a tough year. Bonds fall in value as interest rates rise. It may be a little less obvious why rising interest rates also cause stock prices to fall. Many may think it is simply because rising rates cause the economy and corporate earnings to slow. But that is only part of the story. Consider that many of the stocks that have fallen the most this year are the same great innovative growth companies that have led the market for over a decade. Many of these companies have become indispensable to the modern economy with current and future earnings and cash flow that seem almost immune to the overall health of the economy. It is current value of the future cash flows that has caused the stock market to fall. When interest rates rise, the future cash flows are discounted at a higher rate and thus
are currently worth less than they were when the discount (interest) rates were lower. This is literally what they mean when they call it a market “correction.” Stock prices are being corrected for higher interest rates. Rather than being rattled, long-term investors look at this as an opportunity. Investing at lower prices now can mean higher returns later. The stock market is likely to begin to rise before interest rates peak during the current cycle. While it may seem like this time is different, there is nothing unusual about the current interest rate cycle. There have been eleven other times since 1946 that the Federal Reserve has increased interest rates. Of those times, the stock market has had an average annual rate of return of 5.6%. Many of those periods also included a bear market, defined
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Personal Finance Quarterly | Fall 2022
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