Farther Market Commentary: Don't Miss the Forest for the Trees

With U.S. stocks officially entering a bear market last week, we want to offer some perspective on the latest market developments and thoughts about the future.

In hindsight, it is easy to see how we have reached this point. Starting last fall, the U.S. began reversing both fiscal and monetary stimulus, which had caused low interest rates and historically high share prices compared to company earnings. As a result, longer-term Treasury and mortgage interest rates have risen more than 2 percentage points since last summer; and earnings multiples have compressed from over 22x to approximately 16x (in line with historical averages).

Inflation, which is likely the result of stimulating the economy for too long, was exacerbated by continued supply chain disruptions — such as China’s shutdown over Covid concerns this spring — and by the War in Ukraine, which sent energy and food prices even higher over the last four months.

Furthermore, concerns about consumer sentiment (likely caused by the inflation outlook) and corporate margin compression are leading to warnings of a recession in the U.S. And the Federal Reserve indicated that it would prioritize its mandate to lower inflation over its mandate to target low unemployment, recently raising short-term interest rates by 0.75%.

However, the economic outlook is not entirely negative. The unemployment rate is near its historic pre-pandemic lows. The financial system and U.S. consumers are both in relatively good shape, despite the stock market pullback. While the chance of a recession has increased, it’s not written in stone that the U.S. economy will enter a recession in the near term. Positive developments could occur from a resolution of the War in Ukraine or China reopening, easing supply chain issues.

It’s important not to miss the forest for the trees and remain too focused on the near-term problems. If a person fixated only on short-term negatives, they might never get or stay invested. Investing is a long-term plan for our clients. This type of market volatility is not unprecedented. For example:

1. Bear markets (stock market declines of -20% or more) occur, on average, once every 5.5 years. (Source: First Trust Advisors)

2. During the 42 calendar years from 1980 through 2021, annual returns were positive 32 of 42 years, with average intra-year drops of -14%. Importantly, the average annual return was +9.4%. (Source: JPMorgan Asset Management)

As the adage says: investing isn’t about timing the market, it’s about time in the market. Missing even a few of the best days of a market recovery can severely impact your returns over time. While it can feel painful, pullbacks like this offer the opportunity to rebalance portfolios or dollar-cost averages into portfolios that can improve returns over time.

As always, your advisor is available to discuss your personal situation.

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David Darby

David serves as Chair of the Farther Investment Committee and also advises a select group of clients. With over 25 years of experience working with high-net-worth families, entrepreneurs, and executives, David brings particular expertise in managing multi-asset portfolios of public and private investments. He has spent his career helping clients successfully structure, execute, and implement complex planning strategies.

David was an advisor at Goldman Sachs for 21 years, prior to co-founding DG Wealth Partners, an independent RIA in 2017. DG Wealth Partners merged with Farther in 2022. David and his wife, Helen, live in Palm Beach Gardens, Florida, with their three children.