This quote by Peter Lynch, former manager of the Fidelity Magellan Fund, highlights the importance of being mentally prepared for the inherent volatility and cyclical nature of the stock market.

Recessions and stock market declines are inevitable events that occur from time to time in the economic and market cycles. These downturns are a natural part of the investment landscape, and investors should understand and accept that they will happen periodically.

If an investor fails to acknowledge and accept this reality, they are not truly ready to invest in the stock market. They may panic during market declines, make emotional decisions, and ultimately underperform or even suffer significant losses.

The quote emphasizes the need for investors to have a long-term perspective, emotional discipline, and a thorough understanding of market cycles.

Those who can remain calm and rational during periods of market volatility and downturns are more likely to weather the storms and potentially capitalize on opportunities that arise during these times.

Opportunities in Panic Selling

When markets dip or correct for reasons unrelated to company fundamentals, it presents savvy investors with opportunities. The recent sell-off is a prime example.

From March 28 to April 19, the S&P 500 plunged 5.3% and the Russell 2000 small-cap index fell a whopping 8.2%. Yet this wasn't driven by changes in corporate profitability or growth prospects.

The culprits? Stubbornly high inflation and geopolitical tensions.

Smart investors recognize that panicky selling untethered from fundamentals creates bargains. As rationality returned this week, the S&P 500 has already regained 2% and the Russell 2000 a hefty 2.6%.

Is the correction over already?

I wish, but the last month has been tough for equity and bond investors alike. But tough is actually the norm in investing.

Investing is easy only in hindsight when you look back at price charts that climb a wall of worry that most often fails to materialize.

Investing is difficult because it messes with our emotions. Markets swing between fear and greed but our emotions don’t always match price action. Research has shown that we are between 2 to 3 times as sensitive to losses compared to gains.

Because markets tend to go up, on average, we get used to the gains but become hyper-vigilant when markets go bonkers and our brokerage statements and 401k balances head into reverse. That’s when we feel the stress that makes many investors act like emotionally overloaded teenagers.

Last week as both equity and bond markets were gyrating wildly I was inundated with calls and emails asking for investment advice.

I started with the usual “It depends” answer but soon realized that the best answer was, “Do nothing for now”.

Go for a walk, don’t look at your screen, listen to some music, anything that makes you less nervous. I wrote about this here.

Whenever we go through periods of market stress I first try to identify the causes of the volatility and determine whether they are real or purely transitory.

Over the weekend I spent time thinking about this issue and concluded that the capital markets have become way too sensitive to the path of inflation and the timing of interest rate cuts by the Federal Reserve.

Investors are overreacting to a transitory issue and the cause of market stress is unrelated to the fundamentals.

The downdraft from the March 28 S&P 500 peak barely qualifies as a correction and we have already gained some ground back over the last two days.

As I put the finishing touches to this newsletter the S&P 500 is down 0.22% on Wednesday. I suspect that we will soon enough be back to all-time highs, but for now, I would still say, “Don’t Do Anything”.

The markets have already done some of the work for us.

As of the close of business last night (April 22) here’s what’s happened:

The same pattern of recovery seen across the major asset classes is also apparent when looking at economic sectors within the S&P 500.

The only exception occurs in the Basic Materials sector (down 0.7%) as those stocks continued dropping this week. Some of this is due to the retreat in the price of precious metals.

Technology stocks have led the recovery with a 2.2% return over the first two trading days of this week.

Asset Allocation Performance Review

High-Level Observations:

• All portfolios got dented last week as we experienced a mini-correction.

• Yet, all the asset allocation mixes we monitor are up year-to-date with higher-risk portfolios exhibiting commensurate higher returns.

• Over the last three years, the GF Low-Risk strategy is only up 0.5% on an annualized basis (before fees and transaction costs). Going back 5 years the annualized performance improves to 4.2%.

• Equity-heavy allocations have outperformed more conservative allocations thanks largely to the performance of US large-cap equities.

• The GF High-Risk strategy is up 2.2% on an annualized pre-cost basis over the last three years. Over the last 5 years, the strategy is up a respectable 6.8%.

• Real-world investing strategies are lagging behind the assumed returns in financial plans. Many plans assume a 7 to 8% annualized rate of return. Given recent capital market history it might be time to lower those expectations

• Year to date, commodities have provided a nice boost t investors with an allocation. A big reason is higher oil prices. Most recently, precious metal prices have joined the party providing a further boost.

• International strategies continue getting penalized by the strong US dollar. The strength of the USD has been a surprise to most market observers.

• Over the last week, capital markets have recovered partially from the beatdown inflicted in the first half of April.

• Small Cap Equities and Real Estate - two asset classes with negative sentiment - have led the recovery.

Weekly Performance Attribution

A Bit of Wisdom Never Hurts

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