Showing Symptoms

After a healthy run in the midst of COVID the last few years it’s time for a dose of reality; the stock market is not immune and is starting to show symptoms. 

We’ve experienced three years of positive returns in our investments, but the market is struggling to get off on the right foot in 2022. The S&P 500 is now down about 10% from the start of the year and client accounts are moving in the same direction, unfortunately. 

If you’ve participated in the stock market over the last decade or more, you know a 10% decline is not unusual. In fact, a 10% decline happens on average every 1.6 years. See below.

The relative frequency of this type of pullback makes the symptoms the market is showing more MILD and less SEVERE.

When I got COVID earlier this year I experienced chills for two days and a cough for one day, but thankfully nothing more serious. Within a week I was feeling better and able to perform most everyday duties. The stock market right now is showing something similar; some volatility that would equate to mild symptoms, but nothing serious. 

Things get more serious when the world and the economy face more significant unknowns, like the COVID unknowns of 2020. An unknown virus leading to unknown shutdowns resulting in unknown financial ramifications. Those unknowns resulted in more severe symptoms of a rapid 30% decline in the stock market, as you may remember.

What we’re experiencing now does not have near the unknowns we dealt with during the early stages of COVID. At this point, it appears to be a more traditional pullback based on events that HAVE happened before, and we have some historical context to look back on.

Let’s briefly look at the top three fears the stock market is working through right now and the corresponding time periods of these issues:

  • Inflation and rising interest rates – 1970s: In the 1970s, inflation was a big problem and it took raising interest rates to unprecedented levels before we were able to get inflation in check. It’s helpful to be able to look back on this as we assess the supply chain and stimulus-generated inflation we see now. 
  • Russian provocation in Ukraine – Crimea 2014: This relationship has a complicated past going back hundreds of years. A similar event happened in 2014. While it’s concerning geopolitically and could push the stock market around in the short-term, it’s not something that should affect the long-term earnings of companies this side of the Atlantic.
  • COVID pandemic becoming endemic – Spanish Flu 1918: COVID is still a lingering concern, but it’s less of a concern now because when we compare to the Spanish Flu, we see it took two years to fizzle out into the flu season we know today. We are now approaching the two-year mark in the COVID pandemic. 

We can never be certain if or when there will be unknowns that pop up and create more severe symptoms in the stock market. The people we follow think this is a more run-of-the-mill style pullback that will end as COVID continues to fizzle, supply chain issues are resolved, inflation moderates, interest rates normalize, and the Russian provocation works itself out… all possibly in the second half of the year.

Looking for Opportunities

In the meantime, we’re working to do what we say we do, use these downturns in the stock market to take the large cash position we’ve built up to buy good companies and funds at lower prices.

In the growth stock portfolio, we have three on our list to buy: Ford, Costco, and Taiwan Semiconductor. Ford has seen tremendous interest in their Electric Vehicle lineup, Taiwan Semiconductor is having record profits because of demand in the computer chip space, and Costco looks to benefit from raising subscription prices possibly this summer. 

These companies have been on our list for quite a while and we’re excited to finally have the opportunity to buy them at a ~20% discount to what they were just trading at one month ago.

In our fund’s portfolio, we’ll be rebalancing and buying more of our fund SPDR Stock Index Fund SPTM, so we can take advantage of this pullback and start to increase our exposure to a fund that will go up when symptoms in the stock market abate.

SMB Financial News

In SMB news, Bruce is taking more time off and entering into a semi-retired role. He’ll be stepping away from day-to-day duties in the office to allow for more travel and personal time, but is still available to us here on a consultative basis. He’s been in Brazil with his wife over the holidays, but I imagine he’ll find his way back to the office for the best tri-tip and salmon client lunches on 67th Ave! (Not much competition).

Jeremiah, myself, and our other advisors are still in the office as usual. We’re looking forward to bringing on an intern or admin person to help us with calls and paperwork in the near future. We’ve had several interviews so far, but nothing has been finalized yet.

Something we’ve been celebrating since November is that Jeremiah, one of our advisors and the one in charge of day-to-day operations in the office, has completed his training and passed the Certified Financial Planner exam this year! Like myself, he is now a card-carrying member of the CFP club, and we are beyond proud of him for the work he’s put in the last two and a half years. 

Since joining SMB in 2017, Jeremiah’s worked tirelessly to get up to speed and has earned our respect, the respect of seasoned advisors here at SMB, and of the clients, he’s worked with. One example of the respect he’s earned is that one of our retiring advisors at SMB is looking to Jeremiah to take over his client relationships when he retires in the next few years. He has an incredibly bright future in this business.

My life is getting back to normal after I ruptured both bicep tendons within nine months of each other doing projects on our house we remodeled last year. Both required surgery to reattach. It was incredibly frustrating, but not serious. I now think twice before I pick up anything heavy and can’t wait for my 10-year-old son, Henry, to grow some biceps of his own so he can help me. The fun never stops though, my wife Holly and I are looking forward to another eventful year as she and I just found out we’re having another baby! Surprise! Luckily, we have a few kiddos already that are excited to help out. Time will tell if they will actually be helpful.

As always, we appreciate the relationships we have with our clients and encourage you to contact us if there’s anything we can do for you, or, if you just need a pep talk during a tumultuous start to the new year. If we don’t hear from you, we’ll be reaching out to clients again around tax time to check-in.

Thank you for reading,

 Tim Porter, CFP®