The year 2022 has been rough for investors. Even relatively conservative portfolios are down about 15 percent. A huge culprit has been red hot inflation, currently running at about 8 percent, according to economic consensus. Food and gas are running even higher. That contrasts with a long-term U.S. average inflation rate of 3.3 percent going all the way back to 1914. Inflation this high creates the expectation of higher interest rates, which we are now seeing across the board. That is historically bad for economic growth, stock returns, and the bond markets. Is it possible to maintain one’s optimism in the face of economic turmoil?
Despite this dreary synopsis, investors would be wise to stick with their long-term written plan, unless something significant has changed with their financial goals and circumstances. Successful bond money managers believe inflation is cooling at least a little. That would mean the Fed could slow their aggressive rate hikes, which would eventually be good for the bond market and provide investors with some relief.
As for stocks, there is also reason for optimism. John Lynch of Comerica Bank points out that since 1950, in the 12 months following a mid-term election, the S&P 500 index of large company U.S. stocks has risen an average of 15 percent with no down years.
The charts here contain monthly data from the Dow, S&P, and Nasdaq indices. You can see that, while the markets are down overall for the year, each received a nice bump up in October. This illustrates the importance of maintaining a consistent investment strategy.
Those who remain invested over the long-term historically reap the benefits of the anticipated upturn in the markets. Those who panic during a downturn and sell out of the markets often miss that opportunity.