How far can a bear run into the woods? Only halfway; after that, he is running out of the woods.
- Children’s Riddle
Welcome to the August Edition of Top of Mind!
What’s Top of Mind this month?
This summer, the Pittsburgh CLO staged Into the Woods, a Broadway musical showcasing iconic fairy tale characters on a mission to lift a witch’s spell.
Meanwhile, in the financial realm, investors are wondering if they’re finally "out of the woods" following last year’s financial curse: a bear market.
To answer this question, let’s revisit our “Golden Rule of Bear Markets”:
- Every bear market has a cause.
- At first, investors downplay that cause.
- Then, investors worry about it long after they should.
Sound familiar? Last year’s bear market was triggered by soaring inflation, a factor that investors initially overlooked. Now, even with a dramatic drop in inflation and a 25% rebound in stocks, worries persist that inflation will reaccelerate and the bear market will resume. Yet, based on the “Golden Rule”, investors should be less concerned today about rising inflation.
The “Golden Rule” has been a trusty guide. Why? Because it speaks to the human tendency to cling to the past. The stock market, on the other hand, looks to the future.
Golden Memories
Let’s examine the “Golden Rule” and recent bear markets through the lens of The Economist, one of our favorite financial magazines and a good barometer of investor sentiment.
After last year’s bear market, inflation concerns have lingered. Meanwhile, stocks have rebounded as CPI plummeted from 9% to 3%.
The COVID bear market lasted only a few weeks, but investor concerns persisted about COVID’s effect on the economy.
The 2008 financial crisis followed a similar pattern. Investors feared a “lost decade” for stocks, but markets rebounded as technology companies like Amazon and Google soared.
So, are markets finally out of the woods after last year’s declines?
In one sense, we think the answer is yes. Last year’s rampant inflation and aggressive Fed rate hikes are unlikely to be repeated.
On the other hand, markets are never completely out of the woods. Risks are always present. Another bear market is bound to occur, whether that’s three months from now or three years.
And yet, it is precisely this uncertainty – i.e. the fact that markets are never truly out of the woods – that makes the stock market a good investment. Without such risks, stock prices already would be bid higher, limiting future returns. Only by making peace with the stock market’s inherent uncertainty can investors enjoy its wealth-generating potential.
Through the Woods
Taking inspiration from our earlier riddle, many investors, like the bear, are preoccupied with getting "out of the woods." Yet, investing is less about escaping uncertainty and more about embracing the twists and turns of the journey through a financial woodland of opportunities and risks.
It’s our honor to serve as your guides.
Sincerely,
Kurt, Cassidy, Ken, Teresa, Brian, and Jacque