A Market Christmas Carol

Friday Reflection | December 17, 2021

The holiday season is well underway – a time for gathering, for reflection, and for sharing traditional stories and parables that help illuminate the spirit of the season. One such story is Charles Dickens’ telling of A Christmas Carol, which recounts the redemptive journey of a miserly Ebenezer Scrooge. While much attention is given to the themes of transformation and Dickens’ commentary on the relationship between money and happiness, we will focus on the theme that catalyzed the change in Scrooge’s disposition and offers a helpful framework for investors. Visited by three spirits representing the arc of his past, present, and future, Scrooge was given the gift of perspective.

Grab a warm blanket, a cup of hot chocolate, and join us for a brief reflection on this classic tale and our current market landscape.

When the first ghost visited Scrooge, he was shown scenes from his life at past Christmases. A party hosted by a generous employer, Mr. Fezziwig, brought back warm remembrances while memory of a budding relationship ruined by his own greed was painful to recall. Scrooge had lived through these experiences, but only when forced to reflect on them was he able to benefit from the lessons they provided.

While the past cannot be changed, it holds valuable lessons for investors navigating markets today. The S&P 500 fell more than 30% in spring 2020 at the onset of the pandemic, only to end up more than 15% by the end of last year – and gain more than 20% so far this year. Investors who remained invested through the ups and downs fared best, many of whom relied on the painful lessons and perspective they gained from a similar crash and correction in 2008-2009. Reflecting on that crash and others throughout history makes it easier to avoid alarmist headlines that focus on short-term noise, and to make financial decisions that support long-term growth.

Investors are also reflecting on historically low interest rates that have been a hallmark of the past 10 years as the spectre of higher rates looms on the horizon. The combination of cheap money and COVID disruptions has altered the risk landscape and pushed market prices and valuations higher. Growth stocks and tech companies that were already highly priced grew further and many value stocks and brick and mortar businesses saw declines. Understanding where we are in the valuation cycle helps decision making in the present, and tempers our expectations for near-term returns.

If the Ghost of Markets Present visited investors, they would be shown a global economy in transition. The pandemic that turned the world upside down is slowly shifting into an endemic phase, but the current experience remains one of exhaustion and policy fluctuation. Just this week we saw the return of mask mandates in California, the cancellation of professional sports games due to COVID outbreaks, and new travel restrictions.

The present data on unemployment further highlights the current period of transition. As we wrote in a recent article, the national unemployment rate in the US recently fell to 4.2%. Viewed in isolation, that rate would indicate a healthy labor market with unemployment below historical averages. With additional perspective, we understand the present labor market can’t be judged by the standards of the past. Millions of workers aren’t returning to the workforce.¹ Similar to Dickens’ observations about Victorian England, the current landscape is marked by dramatic wealth inequality. The disconnect between economic realities and market prices cannot continue indefinitely.

The last financial scene to be shown in the tour of the present would be an upward trending graph of inflation data. Just this week, new data showed a 9.8% year-over-year rise in the November producer price index, following last Friday’s 6.8% annual increase in consumer prices. Those continued hot inflation readings – the highest since 1982 – spurred the Fed to further its tapering plans and indicate that interest rates would be increased sooner than they had forecasted a mere six weeks ago. Markets are still within a few percentage points of their all-time highs, but may swiftly react to the Fed’s actions.

The present, while important, often changes so quickly that perspective can be elusive when that is the only frame.

Just as the ghost in Dickens’ story relayed to Scrooge, the future is not set in stone and can be influenced by actions in the present. Most savvy investors understand that future market fluctuations cannot be controlled or forecasted with consistency.

Analysts are already predicting price movements for 2022, with some seeing a vision of a market reckoning as interest rates rise and the virus continues to mutate. If inflation is not brought under control, the Fed may have to raise interest rates even faster, which could disrupt economic growth and stall any stock market gains. Other analysts are predicting a year of continued economic recovery, with an easing of supply chain issues which could, in turn, bring current inflation data back toward historical averages. Stock market prices have historically performed well in the 12 months after inflation peaks, which we may or may not have seen with the November readings.² Lastly, the themes of renewable energy and electric vehicles feel inevitable to many and may help portfolios grow through the economic transition period.

For individual investors, the exercise of envisioning the future is important as it can help articulate current priorities and spur change if the current trajectory is not desirable. Our work with clients focuses on areas where we can exert some degree of influence over future outcomes. Markets can’t be changed, but we can adjust portfolios.

“I will live in the Past, the Present, and the Future. The Spirits of all Three shall strive within me. I will not shut out the lessons that they teach.”
– Ebenezer Scrooge

Sometimes people need a jarring event to gain perspective – whether a pandemic, a market correction, or visitation by Victorian Christmas ghosts. Since these jarring events are not common, the reality is that excess – like Scrooge’s greed or overly optimistic market valuations seen in past bubbles – can often persist unexamined.

Thankfully, most investors and market prices don’t need the magnitude of change that was required of Ebenezer Scrooge. More reasonable changes might include spending choices, decisions to share financial information with the next generation, charitable giving decisions, or impact investment choices. Incorporating the past, the present, and the future into your decision process helps align both your financial and life goals. In our ongoing work with clients, we harken back to our company tagline – Invest in Living – as a reminder that we shouldn’t wait for Dickens-like visitations to articulate our priorities and align our financial lives around our values.

Resources

¹ 4.3 Million Workers Are Missing. Where Did They Go? WSJ

² Stocks Will Rise When Inflation Falls—at Least History Says So Barrons