Third Quarter Market Update: Investment Success is not Determined by One Market Season

Written by John B. Cox, CFA®, CAIA on October 20, 2022

If you are a baseball fan, I’m sure you have enjoyed watching New York Yankees outfielder Aaron Judge chase the single-season home run record in the American League (AL). If you do not follow this sport, it is important to note that the game has been around for over 100 years, and the previous AL home run record was set in 1961 by Roger Maris, and coincidentally, he hit 61 homers that year. Despite media pressure that was weighing on Judge as he got closer to the record, he finally broke the record on October 4th, which means Maris’ record was broken 61 years later. Judge is only 30 years old and will have other opportunities in his career to break his own single-season record, and even enter the top 20 HR hitters of all time, which includes players like Hank Aaron, Babe Ruth, and Reggie Jackson. An interesting observation about the list of the best career HR hitters is that at least five of the players also show up on the list of most career strikeouts. Now you may be asking yourself, “how does any of this relate to investing?”

Many investors have a philosophy of trying to hit “market” home runs by investing in the hottest stocks, which means they do well in some years and then poorly in others. Over long periods, this approach typically leads to disappointing results. Investing success is usually dependent on consistently capturing the returns inherent in the stock and bond markets without doing things that can be detrimental to long-term goals. Unfortunately, this sometimes means enduring years like 2022, when it would be much more “comfortable” to be sitting on the sidelines (or in the dugout) instead of being in the game. However, not being invested appropriately can mean missing the recovery that will ultimately take hold, and no one can accurately predict when it will occur. We know from market history that significant recoveries occurred after the market crash in October 1987, the bursting of the dot-com bubble in 2000-2002 (which also included the attack on September 11, 2001), the banking/housing/financial crisis in 2008-2009 and more recently the COVID-19 health scare (shutdown of the economy) in 2020. We made it through those challenges, and there is no reason to believe that markets will not eventually bounce back from the current headwinds of inflation, rising interest rates and a slowing economy. While stocks can always move lower, the year-to-date declines have already “priced in” at least some of this bad news. Historically, markets have performed well for the 12-month period following mid-term elections (coming up next month) and after the onset of a bear market, which officially occurred on June 13th of this year. These indicators may provide reason for optimism in the next year or two, but investors need to have a time horizon that goes beyond five years. For example, in the five-year period leading up to this year from 2017-2021, there were four strong years (2017, 2019, 2020, 2021) and one sub-par year (2018), but the investor who stayed the course captured a good five-year return and an even better ten-year return.

In terms of third quarter market performance, global equities (as measured by the MSCI All-Country World Index) declined by 6.8%, while U.S. small cap stocks (Russell 2000) and U.S. mid cap stocks (Russell Mid Cap) fell by 2.2% and 3.4%, respectively. As interest rates continued to rise, the bond index (Bloomberg Aggregate) dropped 4.8%. For the year, the bond market is down about 14.6%, while stocks across the board have declined by roughly 25%. While the early days of October started out on a slightly positive note for the markets, there is still a significant amount of investor uncertainty that will keep stocks and bonds volatile in the near term.

Back to the baseball analogy, the players in the Major League Baseball Hall of Fame who received the highest percentage of votes for induction are those who had consistent, long-term careers with high batting averages but not necessarily a significant number of home runs. Successful investing means approaching the markets the way Derek Jeter, Cal Ripken, Jr., and Tony Gwynn approached the game. Going through slumps from time to time is inevitable but pushing through the bad periods to get to the longer-lasting positive periods is the recipe for success in both baseball and investing.

Important Disclosure Information – Waverly Advisors  

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