If prices keep falling, we’ll likely wade in a little more. No one knows when or where the equity market will bottom (trust me, NO ONE KNOWS!), but when US small-caps recently traded down to 10 to 11 times current earnings, we felt there was some value there and waded in a little. Similarly, with equities, a long time horizon changes how I view entry points into sectors of the market I may like. Not knowing where interest rates will ultimately end up, and not being pressed for time, I can wait until I find the right opportunity, and then scoop up bargains when they present themselves. Likewise, tax-exempt yields of 3% to 4% on similar duration high quality municipal bonds make sense to me. For instance, I happen to think that taxable bond yields of 4% to 5% on short to medium-term investment grade debt are very attractive currently. Lastly, long-term investors often have the luxury of waiting until prices hit their level, rather than feeling forced to accept whatever price the market is offering at the time. ![]() Patience is an often under-appreciated characteristic of great investors yet it’s a cornerstone of their investment discipline. In neither case is the investor better off. Very often price volatility leads to short-term knee-jerk reactions to sell and get out of the way or equally damming, catch a falling knife by rashly doubling down on something. The long-term investor also may have a tendency to remain more patient, and ignore the need to “do something” as prices oscillate wildly around. The mindset of the investor changes as the time horizon lengthens. Moreover, the long-term investor may be able to use a spike in volatility as a chance to scoop up some bargains. Monthly statement balances don’t mean as much as there is plenty of time for prices to recover. If one has a time horizon of 5 to 10+ years, be it for retirement, college for the kids, a vacation home purchase, whatever, today’s volatility may be viewed with little more than passing interest. The benefits to being a long-term investor are many, but let me touch on a few that might help one navigate the coming 6-12 months. Unless, of course, one remains focused on the long-term, in which case much of this is just noise. Who to believe and what to believe are the age-old challenges investors face. Labor markets remain strong (the August unemployment rate was just 3.7%) while the Atlanta Fed’s GDPNow forecast suggests a reasonable 2.6% annualized growth rate for the US economy, following declines in Q1 and Q2. Markets are likely to remain in flux until we begin to see more consistent signs that prices are stabilizing and beginning to trend lower. Since the day of Powell’s speech, the S&P 500 has fallen -5.8%, the NADAQ is down -6.6% and the broad bond market has dropped about -1%. He astutely observed that “Without price stability, the economy does not work for anyone.” Lastly, but importantly, he warned that “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.” Ouch. The “less than good” news is that the Federal Funds rate is still only 2.5%, and needs to rise measurably before victory over inflation can be declared.Īt the Kansas City Fed’s annual symposium in Jackson Hole, Chair Powell was unequivocal in stating the central bank’s intent was to bring inflation “back down to our 2% goal”. ![]() The good news in the report was that prices were flat month over month, and the worst of the rise may be behind us. July’s Consumer Price Index report showed an +8.5% year over year hike in the basics of food, energy, shelter and healthcare. This could mean that some more pain for investors is in store, but one can’t argue the need to bring rising prices under control. Be it stocks, bonds, real estate, private investments (yes, those too do fall in value, whether private asset managers choose to acknowledge it or not), you name it, prices have been falling for most of 2022.Īs uncomfortable as the declining statement balances make us feel, we should take solace in the fact that the Fed is finally getting serious about inflation. ![]() Federal Reserve’s Quantitative Easing program transitions to Quantitative Tightening (or rather as they move from expanding their balance sheet to shrinking it, thereby tightening monetary conditions), markets for assets across the investment spectrum are reacting with rising volatility and generally falling prices. #1: Don’t Fight The Fed #2: Don’t Forget Rule #1Īs the U.S.
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