Well, it’s official: the markets entered “correction” territory with both the S&P and Nasdaq officially declining -10% from their July highs in the month of October. Technically the S&P 500 is still up 9% but the DJIA is now negative for the year; for those keeping track, the S&P Equal Weight Index is -4% YTD. There’s still a significant variance between the 3 indexes driven by 7 big names.
Some key items of note in October:
- To start with, the world was shocked by the horrific events in the middle east. Geopolitical tensions add an extra level of uncertainty that investors simply can’t control. Let’s hope for a quick & peaceful resolution for all.
- Bond yields also continued to climb and the 10yr Treasury even hit 5% for a day. There’s nothing magical about 5% but it’s a level the 10yr hadn’t seen in a long time and equities hated it.
- We’re also in the middle of earnings season. At the time of this writing, the bulk of the companies that have reported have beaten estimates. But the ones that didn’t seem to be punished more severely than we typically see. In fact, many that even beat expectations were punished if they didn’t say the right things; it feels like the markets were looking for a reason to be sour. Take Google for example, Google reported their cloud services grew 22% but the street was hoping they’d say 28%, never mind the fact their ad services blew expectations out of the water. The stock fell -10% in one day. For a company the size of Google, that means they shed market cap the size of the entire Nike Corporation…in one day.
- One of the biggest highlights for the month was 3rd qtr GDP: + 4.9%! That was a massive number and probably didn’t get enough attention. Retail sales and consumer spending continue to carry this economy. Another firm reminder that we are definitely not in a recession yet.
Here are the YTD numbers:
Brokered CD Rates
Speaking of things that didn’t get enough attention, every three years the Federal Reserve releases a report on personal finances of American families. The report came out this month and showed that from 2019 to 2022 the net worth of the average American household grew 37%! (Yes, those numbers are adjusted for inflation). The closest 2nd was +18% for the 3 years beginning 2004 & 2016.
As for the markets and portfolios, we’ll be the first to admit the sudden rebound and market gains of the first half of the year caught us by (pleasant) surprise. That said, the Nasdaq had one of its best first half of the year on record. Any time you have that much gain, that fast, it should give some pause for the prudent investor. It’s abnormal not to have multiple -5% pullbacks every year and usually at least one -10% correction as well. We finally had our correction; we believe that’s a good thing. Profits continued to go up while prices came down. Valuations on much of the market appear to be a bit more attractive.
This, so far, hasn’t been anything out of the ordinary but we recognize it certainly doesn’t feel good for many investors to look at their statements. The markets are starting to feel like they’ve gone nowhere the past 2 years. They went on a tear in 2021 coming out of pandemic lockdowns but 2022 was U-G-L-Y. Add a very narrow market recovery for the first half of this year and it can feel like we’ve gone nowhere for a long time.
This is where we remind investors that the 3-year return on the S&P is around 10% (as of 9/30/2023). It’s been a challenging couple years for even the most patient investor, but if we step back and look at the last 3 years, we’ve still averaged a great overall return. That’s why we constantly remind serious investors of our 2 very important philosophies:
- Your time frame really has to be a minimum of 5 years+. Why 5 years? See item #2.
- The market is up 80% of the time. The market goes up more than it goes down…in the long run. If you want the long term 8 – 10% return on equities, occasionally you have to let the markets take some of it away. That’s it; that’s the deal.
For us, that’s still a good trade for most investors.
(If you’re rolling your eyes at this because we’ve said this 9 times now in past commentaries then good, you remembered…it’s working.)
Last thing to leave you with, this comes from Goldman Sachs research: Going back to 1961, anytime the markets have gone up 10%+ from Jan – July, then pulled back Aug – Sept, the 4th quarter has produced a positive return every single time…+6.3% on average in fact. The markets are oversold at month-end, this feels doable to us.
Lastly, Veterans Day is November 11th, thank you to all our Veterans for your service.
Here’s your Useless Fact of the Month:
Did you know that Airbnb wouldn’t exist today if it wasn’t for boxes of cereal? True story: The founders of Airbnb, Brian Chesky and Joe Gebbia, were floundering and needed money badly to get their idea off the ground. Desperate for funds, they noticed that the upcoming presidential political conventions were coming to town. They did what anyone desperate for money would do: They created a cereal box to sell to the convention attendees. They sold Obama-O’s to the Democratic convention and Cap'n McCains to the Republican convention. Laugh if you want but they raised $30k. It was enough for a venture capitalist firm to take notice and give them $600k in start-up money that they needed to get off the ground. Moral of the story: I don’t care what your politics are, everyone loves kids’ cereal.