I hope this finds you and your family doing well!
We have started 2022 with a market correction in stocks, closing down 10% or more from a previous high, as measured by the S&P 500 index. Stocks have increased, with dividends reinvested, around 100% to the upside since the pandemic low on Monday March 23, 2020. In 2021, we did not experience more than a 5% pullback in the S&P 500, the top 505 publicly traded companies in the United States. This is not normal. As I shared in our 2021 Annual Letter, the normal, average annual pullback in the S&P 500 since 1980 has been almost 15%.
The Federal Reserve has kept the federal funds rate at or near 0% since 2008. This rate influences the entire economy including savings rates, loan rates, credit card rates, etc.
The federal funds rate is currently at 0%, and it took us 40 years to get here. Usually, the next move in the financial markets is in the opposite direction with the same velocity. This means that the next several decades could be spent with interest rates going up. When interest rates go up, bond prices go down. They are inversely related. For this reason and historical financial data, most retirement and investment accounts held at Eastwood Wealth are positioned to be more growth oriented rather than being over exposed to bonds in a possible long-term, rising interest rate environment.
Recently, the Federal Reserve has signaled possible increases in interest rates to curb the rising cost of living, also known as inflation. This rhetoric along with conflict between Russia and Ukraine has created near term uncertainty in the global economy causing the bouncing around we’ve experienced as of late.
Unequivocally, the long-term historical results point to a lifetime of staying growth oriented with our investment resources to maximize wealth when utilizing the financial markets. It is a product of our ever-expanding world which global economies follow. Please go back and reread our 2021 Annual Letter where I discussed this idea in more detail. As referenced in the letter:
Good records pertaining to the financial markets go back to 1802, when Thomas Jefferson was President. Since then, mainstream stocks have enjoyed compounded results, before being adjusted for inflation, approaching 10% per year and bonds about half of that. At this pace since 1802, $1 invested in stocks would turn into over $1 billion and over $43,000 in bonds. Since 1802, stocks have averaged about 7% per year above increases in the cost of living, also known as inflation. Owning stocks is a way to grow our assets over time and continue living or improve upon our quality of life.
The above referenced results go back to 1802, though similar impacts play themselves out when viewed over an extended timeframe such as a person’s retirement years. Also, please revisit our Navigating The Ups and Downs of Investment Management article in the Client Center at eastwoodwealth.com. We are in the process of updating some the charts in this article, but the spirit of the piece remains the same.
As we’ve experienced together in the past, our account balances have never moved in a straight line, nothing in life does. I have 100% conviction in our growth-oriented positioning whether the markets move up, down or sideways. It’s simply the only positioning that I’ve found long-term historical evidence supports especially given the facts of where we’re at in the interest rate cycle.
Please know, you always enjoy 100% open lines of communication with me if you ever want to talk about anything, financial or otherwise. I’m here to listen and respond when asked.
Thank you for your continued confidence!
Take care, Tim
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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