Hats Off To You

Jonathan Adomait |

The markets have been ugly this year, and you've been nothing short of impressive. Not panicking during times such as these are challenging, and by keeping a cool head you will be better off for it. The last time the market dropped this much was in March 2020 and the S&P500 dropped over 30%. If you had sold near the low, you would have missed an incredible rally from that point onward. Timing the market is hard, don't try to do it!

One of the reasons why this year has been different has been the positive correlation of most assets. Even "safe" assets such as bonds have sold off. (See below)

(As of Friday, Oct. 14th)

Major markets in the US, as illustrated by NDX (Nasdaq index) and SPX (S&P500 index) were down -34.4% and -24.8%, respectively. Of course this is tough to stomach, however equity investors are generally more conditioned for drawdowns and volatility like this. What's even more crazy is the performance of bonds so far this year. Look at the performance of 10-20 Year US Treasury Bonds (TLH, down -27.5%), or the performance of 10+ Year Canadian Government Bonds (VLB, down -24.9%). Yikes! Historically you might actually see positive performance from bonds when equities dip, but not this year. The rapid increase of interest rates by the government to calm inflation has caused a repricing of all assets - stocks, bonds, and real estate.

Have We Seen This Before?

I'll admit, this period of performance with both bonds and stocks selling off has been rare. There have only been five times in history dating back to 1928 that both the S&P500 and the US 10 Year Treasury bond have finished the year negative. (See chart below)

Source: Compound Advisors

You'll notice in the chart above that typically the drawdowns for a 60/40 portfolio are not as extreme as they've been this year. The last time a 60/40 portfolio has seen the drawdowns that we are experiencing today was in 1931! Historically, this creates much better forward looking returns. Take a peek yourself - look back on all the times the market had some larger negative years and how the next 3-5 years performed. We are in a period of historical opportunity. 

Could There Be More Downside?

Of course, there can always be more downside - no one knows for sure what's in store for us. Again, taking a look back on history we can see that the past 76 years, the average bear market decline was -32%. (See below)

We've reached a -24.8% drawdown so far this year which is near the average bear market decline. Could this be the bottom? 

One final chart I want to bring your attention to illustrates how bearish (or how negative) investors are right now. (See below)

There is a lot going on in this chart, so bear with me. The white line represents the percentage of US Investors that are currently bullish (or positive) on the stock market. You'll notice on the left Y-axis that the percentage of US Investors currently bullish (or positive) on the stock market has gone below 20%. These readings are exceedingly rare and have only shown up 8 times out of the last 50 years. (Read more on investor sentiment here.) The green shaded area shows how long this reading stays under the 20% net bullish reading. Typically being a contrarian in these circumstances pays off, as the markets moved higher in all instances when investors became this negative. (See the blue line represented by the S&P500 after each green shaded area.)

To quote Warren Buffet, "Be fearful when others are greedy, and be greedy when others are fearful." 

Uncertainty causes all of us to doubt the future, second guess what we are doing, and can cause us to make bad decisions. Could this time be different? Do you really think even after such a large drawdown this year we would see larger or similar declines next year or the year after? History suggests otherwise.

If you have any questions on your personal situation or want to chat about the information presented here, please reach out!

Until next month,

Jonathan Adomait
Financial Advisor | CFP, B.Eng