“I’ve observed that investors who look at crisis and say, ‘This too shall pass,’ have historically tended to be more right more often than those who say, ‘This time it’s different,’ and head for the exits.”
-Nick Murray
In last month’s article, we marveled at the greatness of American Capitalism. This month, in recognition of the fact that one-half of 2023 is already in the books, we take a moment for a Mid-Year review.
The Ideas That Guide Us
This year, we are even more delighted than usual to report to our valued clients on the events of the last six months and on the progress of your long-term investing plan. But first, we review a brief recitation of the essence of the philosophy that guides our investing decisions, which has served us quite well over the last 18 months.
We are long-term, goal-focused, planning-driven owners of broadly diversified portfolios of enduringly successful companies. As such, we act continuously on your long-term investing plan, as opposed to reacting episodically to current events and conditions.
We’re convinced that the economy cannot be consistently forecast, nor the market consistently timed. We infer from this that our best chance to capture something close to the full long-term return of equities is to ride out their frequent, sometimes significant, but historically always temporary declines.
These will continue to be the bedrock convictions that guide our investment policy as we pursue your most cherished financial goals together.
Current Commentary
With that said, the following is a review of the critical investing and financial events of the first half of this year:
- After declining sharply for most of 2022, the S&P 500 began trading this year at a level of 3,840.
- As the year turned, it seemed as if the economy might well be in a no-win situation. The Federal Reserve would tighten credit conditions enough to stamp out inflation, thereby plunging us into recession, or it would relent, avoiding recession but permitting inflation to burn on. In either case, we were assured that corporate earnings must be about to decline significantly, boding ill for the stock market.
- To this apparently intractable situation, the first half of 2023 added three new and potentially critical uncertainties: the specter of U.S. government default, a wave of bank failures that seemed to threaten the banking system itself, and a renewed outbreak of fear surrounding the dollar’s shaky status as the world’s reserve currency.
- Yet, after enduring that relentless onslaught of crises, the S&P 500 closed out the first half of 2023 at 4,450, up 15.88% for the year so far. We are almost tempted to say, “You read that right,” and leave you to draw your own conclusions. Instead, we’ll just repeat Peter Lynch’s timeless maxim: “The real key to making money in stocks is not to get scared out of them.”
- In that sense, these six months represent for us—and we hope for you — a successful investing career in a microcosm. We did all that could be asked of us. Amid well-nigh universal pessimism, we didn’t get scared out.
- Rather, we stayed focused on your goals and on your long-term plan, with confidence that the management of the companies we own were husbanding your capital with diligence while they sought out new and potentially greater opportunities amid the adversity.
In summary, everything that happened (and didn’t happen) in the first half of 2023 turned out not to matter much. What mattered was that together we chose not to react. Is it possible that a lifetime of patient, disciplined investment success is just that simple? We certainly believe it can be, and we sincerely hope you do too.
Looking Ahead
We got a good chuckle out of a recent headline on our CNBC feed that promised:
15 strategists predict how global stock markets will end 2023: and reveal how to position!
As we have suggested in the past, we would not be caught dead making a prediction about the financial market events that are yet to come in the remainder of this year. We find such short-term prognostications to be a foolish waste of time because the future is far too unpredictable for anyone to get it right with any consistency. We will leave this exercise to the pundits and “strategists” in the financial media.
However, we will offer the following observation about the long-term future:
In the 3rd week of June, just as the S&P 500 surmounted 4,400 (up from a low of around 3,600 barely eight months earlier), Bloomberg posted an amusing headline. They described the current situation as a “gravity-defying bull market,” implying that not only is a new bull market in full force but that it has already soared to “gravity-defying” heights.
Of course, a headline like this was inevitable because this is how the pessimists in the financial media and asset management community always react when they know they have been proven wrong. The “expert” strategists in the media have spent the last 18 months proclaiming the imminence of either (a) an economic recession, (b) intractable inflation, (c) a collapse in corporate earnings, (d) a U.S. default over the debt limit, (e) the dollar turning into toilet tissue, (f) a banking crisis on the scale of 2008-09, (g) a crash to new lows in the stock market, or (h) all of the above. However, with the S&P 500 up almost 16% for the year, they must admit that their pessimism was wrong. It is typical that they will only do so grudgingly, adding the qualifier that the current market has irrationally soared to “gravity-defying” heights.
Of course, this headline implies that not only has the S&P 500 been experiencing a “new bull market,” but that this irrational market is also currently “defying gravity,” and thus, only a short way away from the inevitable crash that will restore the laws of gravity and bring equity prices back to earth.
A “New” Bull Market?
It is worth noting that there is no official definition of exactly what constitutes a “bull market” in stocks. However, it seems illogical to describe the equity market as experiencing a “bull market” while it is still in the process of recovering from a prior downturn. By our definition, it is only logical to declare a “bull market” when the S&P 500 has surpassed its prior high and is rising to new territory.
In this particular case, it happens that the S&P 500 reached a high of 4,819 over 18 months ago, in early January 2022. It ended June of this year at a level of 4,450, still down roughly 7% from its high only 18 months ago. By our definition, this constitutes a continued “recovery” in stock prices, not a new bull market. In our view, the bull market starts after the S&P 500 breaks through 4,819 again.
We feel rather confident in this view, particularly as we saw the past behavior of equity prices after a pullback. Historically speaking, the real action in a bull market occurs after a new high has been made. As we examine the chart below, it is difficult to consider the current market as “defying gravity.” Historically, each subsequent bull market peak typically represents a significantly higher new high than the prior peak:
In reality, we don’t believe that labels like “bull market” and “bear market” are of any practical use in formulating long-term investment policy anyway because these distinctions are a great way to distract us from what is really important in our investing efforts.
In actuality, there is never a “new bull” market. The equity market is in the same long-term bull market that started around the time the stock market was first formed back in 1792. In those days, the world’s first and by far most successful capitalist democracy was just getting started, under the protection of what has turned out to be the longest-surviving constitution in history – and U.S. equities have been compounding at seven percent over inflation ever since. There is simply no precedent for this in the history of capital markets.
To a long-term, goal-focused, plan-driven investor, whether the equity market is waxing or waning—whether it’s in a “bull market” or a “bear market”—is really irrelevant. When the market is advancing, as it overwhelmingly does, the investor is being directly enriched by it. When it is temporarily setting back, his/her increasing dividends are being reinvested in that many more lower-priced shares. In both phases, the marvel of equity compounding continues. This is all we need to know.
Helping Those You Care About
Over the last year and a half, the faith of all long-term investors has been severely tested. As must happen every few years, we were basically required to do just one big thing: reject the idea that “this time it’s different” and hew to the belief that “this too shall pass.” We must not doubt that we’ll get many additional opportunities to practice patience and discipline in the years to come.
Successful investing, while always fundamentally simple, will never be easy. You may have a family member, colleague, or friend who perhaps did not fare as well during the 2022-23 bear market and who you feel might have benefited from the sort of advice you were receiving. Should that be the case, we would certainly appreciate your introducing us to them. We very much enjoy working with you and would welcome the opportunity to offer the same level of planning and service to people whom you care about.
Thank you, most sincerely, for being our clients. It is an honor and a pleasure to serve you.