Broker Check

Stock Market Behavior

February 21, 2024

It is delightfully simple and genuinely compelling to summarize the stock market behavior, not only in the calendar year just a month ago but over the last two years. I can do it in two sentences:

In 2022, the Dow, the S&P 500, and the Nasdaq 100 experienced peak-to-trough declines of 21%, 25%, and 35%, re­spec­tively. A week before Christmas 2023, all three were on new high ground on a total return basis (that is, including dividends).

Why stocks did this is irrelevant to the beautiful lessons from this experience. There are almost as many theories and explanations of why as there are market commentators, of whom I am happily not one. (I would point out, however, that the number of said commentators who successfully forecast both the market action of 2022 and that of 2023 is plus or minus zero.)

What should matter most to us long-term, goal-focused, plan-driven stock and bond investors is not why this happened but that it happened. Specifically, there could be a pervasive and very significant bear market over most of one year, and those declines could be entirely erased in the following year. Although it is quicker and more perfectly symmetrical than the 2022-23 experience, that's how it works in the most significant sense.

As always, I break the first half of the client investment update letter into two parts: the timeless and enduring principles reinforced by these two years and then the consideration of current conditions.

General Principles

  • The economy cannot be consistently forecast or the market be consistently timed. Thus, we believe that the highest-probability method of capturing stocks' long-term return is simply to remain invested all the time. For us, stocks are generally in your later bucket and are usually earmarked for money you will not need for next ten years.
  • We are long-term owners of businesses, as opposed to speculators on the near-term trend of stock prices.
  • Though frequent and sometimes significant, decline in the mainstream stock market has always been surmounted, as America's most consistently successful companies ceaselessly innovate.
  • Long-term investment success most reliably depends on making a plan and acting continuously on that plan.
  • An investment policy based on anticipating (or reacting to) current economic, financial or political events/trends most often fails in the long run.

Current Commentary

  • The long-term disruptions and distortions resulting from the COVID pandemic are still working themselves out in the economy, the markets, and the society itself in ways that can't be predicted, much less rendered into coherent investment policy.
  • The central financial event in response to COVID was the Federal Reserve's 40% explosion in the M2 money supply. It predictably ignited a firestorm of inflation.
  • To stamp out that inflation, the Fed then implemented the sharpest, fastest interest rate spike in its 110-year history. Both bond and stock markets cratered in response.
  • Despite this, economic activity just about everywhere but in the housing sector has remained relatively robust; employment activity has, at least so far, been largely unaffected.
  • Inflation has decreased significantly, though not yet close to the Fed's 2% target. But prices for most goods and services remain elevated, straining middle-class budgets.
  • Capital markets have recovered significantly, as speculation now centers on when and how much the Fed may lower interest rates in 2024, and whether a recession may begin, whatever they do. These outcomes are unknowable—probably even to the Fed—and don't lend themselves to forming a rational long-term investment policy.
  • Significant uncertainties abound. Trends in the U.S. federal deficit and the national debt continue to appear unsustainable. Social Security and Medicare appear to be on paths to eventual insolvency unless reformed. The serial debt ceiling crisis continues, and a bitterly partisan presidential election looms. The markets will face significant challenges in the year just beginning—as they do every year.

My overall recommendations to you are what they were two years ago and what they've always been. Let's revisit your most important long-term financial goals soon. Stay with our current plan if those goals haven't changed. And if our program is staying the same, there'll probably be no compelling reason to alter your portfolio materially.

As always, I welcome your questions and comments and look forward to talking with you soon. Thank you again for the opportunity to serve you and your family. It's a privilege for me to do so.


Adam Freeland