Weekly investment strategy - Butler Financial, LTD
Recession or no recession? - July 29, 2022

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Weekly investment strategy

Review the latest Weekly Headings by CIO Larry Adam.

p>Key Takeaways

  • Don’t lose sight of the power of compounding
  • Timing the market is rarely a successful feat
  • Overt bearish sentiment is a contrarian indicator

In the words of the American journalist and author Earl Wilson, “a vacation is what you take when you can no longer take what you’ve been taking.” And after the equity market’s worst start to a year since 1970 and the fixed income market’s worst start on record, I think we could all use a vacation! Investors are rightfully feeling exhausted. The prolonged Ukraine/Russia conflict, the stress of predicting the Fed’s next move, the fears of a recession, and the anticipation of a less optimistic earnings season has weighed on market sentiment. But a timely vacation may be exactly what is needed as we enter the second half of the year. In fact, the chance to step away from the day-to-day market activity may allow investors the opportunity to reflect on some of the steadfast and timeless principles of investing and asset allocation to hopefully return with a more optimistic perspective.

  • Compounding Will Help You Pass The Time Away | Compounding is one of the most underappreciated dynamics of investing. Even investors with decades-long time horizons can get distracted by near-term performance and lose sight of the power of compounding. For example, assume an investment of $100 per month in the S&P 500 beginning in 2002. Over this twenty-year time period, the investor would have deposited a total of $24,000 and would have experienced three significant S&P 500 bear markets: the Great Recession (-57%), the COVID-19 pandemic (-34%), and the 24% decline this year. Even still, the initial investment would have more than doubled! In fact, the portfolio would have a market value today in excess of ~$62,000. This is a reminder that a consistent strategy of periodic inflows and a long-term investment horizon can help weather severe downturns.
  • The Hustle & Bustle Of Timing The Market | Attempting to time the equity market can be detrimental to a portfolio. The task of exiting the equity market prior to perceived troubled times with the goal of returning at a more opportune moment is one at which few are successful. Even if the choice to sell is easy, it is often the decision as to when to reinvest that proves to be the most challenging. A more effective strategy is understanding the risk associated with the equity market, remaining disciplined, and staying patient during times of volatility. Case in point: the annualized price return for the S&P 500 over the last 20 years is ~7.3%. Investors who missed the top ten best trading days (of the total 5,033 trading days) would have cut their average annualized return in half to 3.2%. Even worse, investors who missed the top 20 best trading days would have seen their performance reduced to a mere 0.6% annually. And for those assuming that some of these best and worst days have occurred this year – they haven’t! Despite the above-average number of 2%+ swings the market has experienced so far this year, the S&P 500 would have to move ~4.8% in either direction in a single day in order to make the ranks of the best and worst days over the last 20 years.
  • Avoid The Sentiment Crowds | When it comes to investor psychology, it is important to understand that extreme levels of optimism or pessimism tend to represent a contrarian view of what type of performance to expect moving forward. When you have very depressed, pessimistic equity sentiment (as we have now), where the vast majority of investors are expecting stocks to decline, robust equity performance tends to follow. For example, one year later, the S&P 500 has historically been positive 90% of the time and up, on average, 15%. Conversely, when a vast majority of investors believe the equity market is likely to increase, the forward 12-month performance has been positive only 55% of the time with essentially flat performance. This dynamic is why the famed investor Warren Buffet often says, “Be fearful when others are greedy and greedy when others are fearful.”
  • Diversification To Reach Your Destination | The balance of risk and reward is a decision every investor has to make. But for long-term investors, diversification has proven to be more successful than chasing the best performing asset class each year. We acknowledge that diversification benefits have been limited this year given the decline in both the S&P 500 and the Bloomberg US Aggregate Bond Index, but this year is an outlier. In the last forty years, the indices have been negative simultaneously in the first half of the year only two other times: 1984 and 1994. While the specific allocation and metrics dictating when to rebalance would be best discussed with your financial advisor, the existence of a financial plan and asset allocation strategy should serve as a guide and keep emotions from dictating portfolio decisions during volatile times.
  • Please join us on Monday July 11th at 4PM EDT for our Quarterly Coordinates webinar titled “Deciphering The Market’s Difficult Message.” Chief Investment Officer Larry Adam will share our insights regarding the major asset classes, portfolio positioning, and factors driving market performance in the months ahead: https://go.rjf.com/3Q22QC

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All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results.

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