What a year it’s been financially! Here’s a snapshot…
A year ago, the stock market, as measured by the Dow Jones Industrial Average, closed at 34,390. Today (I’m writing this on September 30, 2022) the Dow stands at 28,725—about 17% lower!
Meanwhile, the S&P 500 has been falling since early January!
A year ago, an economist wrote, “We believe inflation peaked in second-quarter 2021. Average core CPI inflation will likely slow from 5.5% in 2021 to 2.7% and 2.5% in 2022 and 2023, respectively.”
I bet that woman wishes today she hadn’t written those words. (I won’t be so cruel as to name her.) Clearly her optimism was misplaced; however, she has lots of company.
Rather than slowing, inflation has soared! This, in turn, prompted drastic action from the Federal Reserve Bank.
The Federal Reserve, or Fed, has as its mission, per Congress, “maximum employment, stable prices, and moderate long-term interest rates.” I heard an official from the Dallas Fed say once, “You can always count on the Fed to be like a bull in a China shop, late to the party and late to leave.”
Timing and “gentleness” aside, no one should doubt Fed Chairman Jerome Powell’s commitment to bring inflation under control. Under his leadership, the Fed began aggressively raising interest rates in an attempt to put the brakes on inflation.
But hiking interest rates 3% in just six months has been painful medicine—leaving the bond market in shambles.
Bonds work like this: When interest rates go up, the value of a bond goes down. You don’t have to be a math whiz to realize that when investors have the choice between a bond paying 4% and another paying 1%, that 1% bond is going to have to be sold at a pretty steep discount for anyone to buy it.
Okay, that’s enough looking backwards.
What’s ahead? What can we expect a year from today? (Be forewarned! My powers of prognostication are only rivaled by my ability to grow hair!)
With the financial markets in bear territory (i.e., having fallen 20%), the question everyone is asking is, “How long will it take to recover all these losses?”
You won’t be comforted to hear me to say, “I don’t know.”
But I don’t know. No one does.
Some folks get attention (and make a nice living) announcing when the markets will bounce back; others by insisting they never will. History, I should note, is on the side of those who believe the markets will rebound. But as to when that might happen, don’t be fooled. No one can say for sure.
It’s worth pointing out that, historically speaking, the average bear market lasts a little less than a year. Maybe this time we’ll be so fortunate.
What we do know is that the financial markets are the intersection of buyers and sellers all haggling over the value of the best run companies in the world. There is a built-in “survivorship bias,” meaning that, in markets, the strong companies endure. That’s to our advantage.
What was true a year ago—and will still be true a year from today—is that financial markets, despite their uncertainty, remain one of surest, and most accessible methods for ordinary Americans to build and grow wealth over time.
Bear markets are the price we pay to keep the financial markets healthy, pruned and productive.
If you’re anxious about what all this means for your future, I’ve created a comprehensive checklist of pre-retirement questions for people who are 60-something. It’s free if you’d like a copy. Email me at firstname.lastname@example.org, and I’ll send it to you right away.
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