Over the last 12-13 years, investors have gotten used to the idea of stocks coming back quickly. 20% pullbacks like the one the S&P 500 just (nearly) experienced haven’t been unusual. In fact, we’ve had two in the last four years (2018 & 2020). Both of those bearish periods were followed by fast and strong rebounds for stocks. However, the way this one is likely to be different is in the swiftness of the recovery. While I certainly believe the current sell-off represents an opportunity, I also expect the rebound will take longer than in years past.
Expectations drive our decisions
Framing proper expectations for the market’s rebound are very important. If you expect the market to come back quickly, and it doesn’t, you may grow frustrated and make poor decisions as a result. The same can be said if you don’t think the market comes back at all… there needs to be a balance. Here’s two baseline expectations I have for the next 12 months:
- I don’t expect the market to fall much more than another 5-10%, if at all (25-30% decline total)
- I don’t expect the market to make new all time highs (which is 20% higher).
In other words, you could say I expect the market to be stuck in a trading range. Given that I don’t expect a severe bear market in stocks, I’m opposed to raising cash with hopes of being able to buy back in meaningfully lower. Since I also think stocks struggle to make new all time highs, I’m not rushing to buy stocks hand over fist either. In reality, I’m doing a whole lot of nothing right now. (Morgan Housel wrote a great article in 2018 on the power of doing nothing which you should read).
More times than not, it’s a good idea to avoid grandiose proclamations… “The market will crash!”… “Stocks are set to bounce big!”… Neither of these are very helpful comments. They do nothing but build preconceived notions in your psyche, which your ego may respond to in an effort to confirm bias. Investing based on extreme expectations is a low odds strategy.
Random market expectations
Take some time to develop 2-3 expectations for the market. Once you have these expectations in hand, you can evaluate if your current portfolio is in line with those expectations. Perhaps you need to talk with your advisor or a trusted confidant in the process. Below, I will share a list of some of the general investment topics that have been coming up with clients, and some “best guesses” with each. My goal is that, if you need one, perhaps I can provide a second opinion for some of your own expectations.
- On stocks… as alluded to above, I think fears of a market crash are overblown. Crashes are quite rare if you look at the numbers from a historical perspective, especially against the backdrop of the current labor market.
- On crypto… this is a speculative market that was clearly in some type of bubble. That bubble has burst and it’s going to take at least a couple of years to sort through.
- On mortgage rates… I’d like to think that at 5.50% they are near the high end of where they will be for the next 1-2 years. Many buyers have been priced out and I think the housing market will cool as a result. I don’t think you’ve seen 4% rates for the last time.
- On inflation… from the perspective of ever-rising prices, inflation is already slowing. But the inflation of the last year isn’t likely to reverse. You’re probably not going to see $3 gas, or super low airfares, anytime soon.
- On bond yields… fixed income investors finally have yields they can be excited about. Quality bonds are now offering 4-5% depending on where you look. These are rates that investors should take advantage of.
What are some of your expectations?
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