Has A Recovery Begun?

I was excited to have had the opportunity to hear a speaker from Capital Group (also known as American Funds). The presentation was called the “Guide to Market Recoveries,” It put the current market (Aug. 2022) into some historical context that we thought was helpful.

Here are some key takeaways:

• Undoubtedly, 2022 has been a challenging year, especially in the first two quarters. Stubborn inflation coming out of COVID was exacerbated by conflicts in Ukraine and Taiwan, and the effects of these and other conflicts continue to be volatile.

• With interest rates rising, declining bond prices and stock indexes have taken a toll on even the most balanced portfolios this year. And with every new headline, investors in many segments are incredibly jittery.

It’s easy in times like this to take our eyes off the prize and focus solely on the day-to-day movements in markets.

There were some rebounds at the beginning of August as stock and bond markets showed signs of moving upward. Gas prices began declining, and inflation impacting consumers and producers stopped hitting new highs.

The hope is if inflation begins to tame, the Federal Reserve will not be forced to continue to raise interest rates to the point that our economy goes into a harsh recession.

Even though we have started to get some relief, it is unlikely the recovery will be a smooth one. In fact, this was one of the points made in the presentation:

“The good news is bear markets have been relatively short compared to recoveries. They can feel like they last forever when we’re in them, but in reality, they are much less impactful compared to the long-term power of bull markets…But even though the average bull market has averaged a 279% gain, recoveries are rarely a smooth ride. Investors often must withstand scary headlines, significant market volatility, and additional equity declines along the way.”

There is no doubt we are contending with scary headlines today, but it’s important to remember that we’ve seen these before, and there is no reason to think we will not see a recovery here, which could happen quickly. Another point made in the presentation was that: 

“recoveries, especially after sharp declines, come quickly. We don’t know exactly what the next recovery will look like, but history shows us that stocks have often recovered sharply following steep downturns. We tracked the 18 biggest market declines since the Great Depression, and in each case, the S&P 500 was higher five years later. Returns over that five-year period averaged more than 18% per year.”

Maybe the presentation's most interesting point was examples of companies created during tough markets. These are leading companies today, such as Walmart in 1962, Airbus in 1970, Adobe in 1982, and Uber in 2009. This highlights how these times of great turmoil can create opportunities for long-term investment, and we should not abandon our long-term goals even with the skies look very dark.

Finally, this quote from the great investor, Warren Buffet, sum it up well:

“Be greedy when others are fearful.”

There has been no shortage of fear, and likely we will see more, knowing that recoveries are rarely smooth rides but usually pay off for those who rise above the headlines. It is my belief the recovery has begun, and while we are in a recession, it should be relatively mild. Even a mild recession can create great opportunities, as we see from this historical context.

I want to thank you for your patience during this trying time, and I want to reiterate how much I appreciate your business. Please do not hesitate to ask if I can do more to serve you.

Source: Capital Group: “Guide to market recoveries: How to stay focused on the long-term success 2020 edition.”