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Thoughts On the Bear Market, Recessions and Inflation

Hello Friends,

I am starting to hear some of the “experts” suggesting that perhaps we have put in the bottom for the most recent bear market and that maybe the Fed can engineer a soft landing after all.  As always, we won’t know the definitive answer until well after the current episode is over, but I thought it would be interesting to share some data that I have been looking at.

As you may know, the S&P500 logged its current all-time high on 1/3/2022 at 4,797 and then proceeded to fall 23% over the next six months to close at 3,667 on 6/16/2022; making the bear market official.  Maybe that was the bottom or maybe we are in a relief rally but as of yesterdays close the S&P500 is up 17%, regaining more than half of the sell off.  If you have been patient and sticking to your long-term plan, congratulations!  

As the chart below illustrates, in the last 20 years if you stayed fully invested in the S&P500 your annualized return would have been 9.40%.  What blows my mind away is that if you missed only the 10 best trading days during that period, your annualized return was almost cut in half: down to an annualized return of only 5.21%.  But alas, it gets worse.  If you missed just the best 20 trading days over that 20-year period, you ended up with a paltry annualized return of 2.51% meaning you didn’t even keep up with inflation which historically runs at 3% per year.   


As always, it’s time in the market, not timing the market that counts.

There has been A LOT of talk regarding recessions and inflation and unfortunately because of the upcoming midterm elections, I don’t think we’ve heard the last of it so what I’d like to do is strip out the noise and take a look at some historical facts.



  As the chart below illustrates, “the market” tends to always look over the valley to the future.  You’ll notice that with only one exception (March 2001-November 2001), the S&P500 has bottomed around the middle of a recession (indicated in gray) and has started its recovery even as the unemployment rate is surging.  Historically, the best time to stick it out has always been when it feels the worst and the “experts” are sounding the alarms.


The biggest risk to a long and fulfilling retirement is loss of purchasing power, not loss of principal.  As I say all the time: The market has historically never lost anyone money as long as they have been able to ride out the temporary declines that have always given way to the permanent advances.  The real killer is inflation.  In a 30-year retirement, what costs $1.00 today will cost $2.40 in 30 years at trendline inflation of 3%.  The good news is the best hedge against inflation has been dividends from equities.

As the chart above illustrates, dividends from equities not only preserved your purchasing power, but they also increased it.

One last thought on inflation.  The last period of persistently high inflation was in the late 1970’s and into the early 1980’s.  Some of you may remember your high mortgage rates and what the bank’s were paying on CD’s.  Then Fed Chair, Paul Volcker, made it his mission to break the back of inflation and purposely sent the economy into a recession.  The S&P500 went down 27% from November of 1980 to August of 1982.  What happened next was amazing.  Once the market believed inflation was under control the entire decline was erased in 4 months and one of the greatest bull markets in history was off and running.

In closing, I don’t know if we’ve put in the bottom for this bear market or not and I don’t know if we are in a recession or if inflation is under control; and neither does anyone else.  What I do know is that time and patience are our friends and in the end us long-term, goal focused investors will be handsomely rewarded.  

As always, it is a pleasure to serve you and please reach out if you would like to discuss any of these topics in more detail and have a great day!

 Warm Regards,

David Henderson

This is being provided for informational purposes only, and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results, and all investing involves risk. Index returns shown are not reflective of actual performance nor reflect fees and expenses applicable to investing. One cannot invest directly in an index. DCH Wealth Management, nor any of its members are tax accountants or legal attorneys, and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional. The views expressed are those of DCH Wealth Management and do not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates. 

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