Change Under the Surface

Friday Reflection | June 3, 2022

The hallmarks of summer are starting to be visible – school is letting out, vacations are being scheduled, blockbuster movies are making their theatrical debut. These patterns are familiar, and on the surface give the impression that life’s patterns are proceeding as they always have. Looking more deeply, we see the economy continuing to adapt to pandemic disruptions and their ripple effects. New COVID waves are bringing back mask requirements, road trips are being reconsidered in the face of high gas prices, and despite the record-setting release of Top Gun over Memorial Day weekend, movie industry distribution is largely going direct to streaming.
 
Investors are cautious in the face of these changes and rearrangements. Like summers in Berkeley, there is a fair amount of fog in the forecast that makes it difficult to see clearly.

Recent stock market action reflects a sense among investors that many key risk factors from earlier in the year are unresolved. Investors are expecting interest rate increases but lack confidence that peak inflation is behind us. The war in Ukraine drags on and the economic fallout from sanctions and supply chain disruption continues. Covid virus mutations proliferate as global policies of response vacillate. None of these risks are new. Until investor outlook shifts with a real or perceived resolution, we expect continued volatility.
 
In terms of market performance, the past month has been chaotic but flat. The S&P 500 finished the month of May with growth of 0.01%, opening the month at 4,131 and closing the month at 4,132. Like a roller coaster ride that ends exactly where it started, the headline of a flat market hardly matches the experience of the prior month for most investors.
 
As of May 19, the S&P was down almost 6% for the month and on the verge of a bear market year-to-date. Then prices reversed course, rallying 6% over the final week of the month. The S&P 500 index moved 2% or more on 8 days in the month of May, far exceeding the historical average of only 8 days in an entire year. To have these significant swings and ultimately net out to neutral can feel disorienting to investors, but it doesn’t change the wisdom of staying invested through periods of market turbulence.

It is seductively easy to observe market patterns and economic cycles in hindsight. Financial media will show charts that make it seem like the eventual outcome was obvious in the moment. Even our own memory will often deceive us into thinking that we should have taken some prescient action to avoid any portfolio losses or capitalize on a hot sector. In the real world, attempting to time the market usually results in lower returns over any significant time frame. We instead advocate time in the market as the more prudent strategy. Time and patience are the allies of all successful long-term investors. 
 
At North Berkeley, we firmly believe that those investors who don’t succumb to hubris – or the fear-mongering of financial media – are the most likely to reap the benefits of long-term market growth. We expect price volatility to continue until there is resolution, or at least material progress, on some of the big questions around inflation, supply chains, and the Russia-Ukraine war. Being a long-term investor means tolerating these periods of uncertainty, and knowing that they will also lay the foundation for the growth that will follow.