2022 has been a tough year so far for equity markets, with the S&P 500 Total Return Index having dipped below the 20% drawdown mark which signifies an official “bear market.” Severe equity market declines, the highest inflation levels in decades, a war in Europe, and rising interest rates have rightfully given market participants a lot to worry about. At Maple Capital, our clients are no different and we have many conversations with investors about the current environment and what to expect moving forward.
A common topic in many recent conversations has been around portfolio positioning. For more conservative and often older investors near or in retirement, the question comes in the form of
“Should I pull money out of riskier assets like stocks to ensure my retirement can stay intact?” or “if we know rates are moving higher or stocks are moving lower should we wait for this volatility to subside before investing?” For younger clients or those still in the accumulation phase it often times comes as “it seems like things are getting worse, should I wait and put my money in after the market drops further?”
These are basically all variations of the same question, “if we feel like we know where markets are going to go over the short term, doesn’t it make sense to take some sort of action in the short term?” There is one problem with this line of thinking: unfortunately, we don’t know where markets are going to go in the short term. This first graph highlights the range of equity market returns from short term on the left, to longer term rolling periods on the right. What is obvious from this graph is that equity markets can be volatile over short time periods as short term movements in stocks generally reflect how people feel. Still, over the long term (moving right on the graph), volatility tends to fade away as stocks generally trade to the value implied by the cashflows generated by the business. Or as Ben Graham once said, “In the short run, the market is a voting machine but in the long run it is a weighing machine”.
Once we come to the conclusion that we don’t know where markets are going in the short term but do have a good idea that they trend higher over long periods, we arrive at how to position portfolios for this type of environment. For portfolios that are appropriately allocated between asset classes given the long-term goals and objectives for a client balancing the investor’s willingness and ability to take risks, we treat this environment like we treat all other environments – search for good opportunities to take ownership in companies with durable long term competitive advantages at reasonable prices. For new money, or money that has been on the sidelines, we do encourage investors to wade into the markets. As mentioned above, no one knows where markets will go in the short term, and we could absolutely go lower from here in terms of short-term market performance. But looking at the forward returns for the S&P 500 after a 20% decline (highlighted in the graph below) is impressive and begs the question: why wait?
There is much more we could write about this topic; like that “waiting for volatility to subside” usually means missing out on a good bit of the initial return in the bull market that follows a bear, or that having an asset allocation you can stick with during a bear market is an essential part of the planning process. Accepting that we don’t know where markets will go in the short term, but that markets tend to drift higher over time and that historically performance has looked good after a 20% drawdown can help us avoid making potentially devastating decisions with our investments.
Maple Capital Management, Inc. (MCM) is an independent SEC Registered Investment Advisor with offices in Montpelier, Vermont and Atlanta, Georgia.
This commentary reflects the views of MCM and should not be considered to be investment or financial advice. MCM does not warranty these views and will not update this communication after the date of publication. Any mention of specific securities is done for illustrative purposes and the securities mentioned may or may not be held in client accounts. No assumption or assurance should be taken that securities mentioned will be safe or profitable investments. Past performances are not indicative of future results.
For further information, please contact Steven Killoran at 1-802-229-2838 or at [email protected]. For further information about Maple Capital, including a copy of our informational brochure, please visit our website at www.maplecapital.com.