Returns and Market Corrections

August 12, 2021    |    Sage Capone

Helping clients understand that money management is not short-term but a long-term process.

Whenever I meet with new, existing or prospective clients, I make sure to develop their risk tolerance along with providing them a Hawaii Financial Plan or Financial Blueprint.

In preparation, I stress the importance of time horizon, risk tolerance and always thinking long-term with financial markets.

Jim Reid and his team at Deutsche Bank put together the Long-Term Asset Return Study which was called “The Age of Disorder.”

In this study, you will find some comfort in the research on 200+ years of asset class returns and different time frames.

Again, short-term returns in the stock market are very unpredictable but over the long-term we see how returns begin to be far more stable.

In this first photo below, you can see the Deutsche Bank Returns After Inflation followed by a photo of Real Returns.

Deutsche Bank Returns After Inflation

Deutsche Bank Real Returns for US Assets Over Different Time Horizons

As you can see from the data, the stock market provides you with much higher odds of outpacing inflation and increasing your standard of living.

Cash may feel safer than the stock market but in 5 of the past 11 decades it had negative real returns.

Remember, for clients that are planning on buying a home or a big purchase in next 3-5 years. I would not advise that you invest that premium in the market because over the short-term we can’t predict your return or what will happen in the stock market.

When looking back in history since 1950, the S&P 500 has faced 36 drawdowns.

If you’re wondering, that works out to one every other year.

The volatility will always be there but if you choose to be an optimist you can see that presents great buying opportunities.

S & P Drawdowns since 1950

When looking at this data, you either look at these numbers negatively or positivity.

After every bear market in U.S. stock market history it has led to new all-time highs at some point in the foreseeable future.

That means you have plenty of time to add new capital if the opportunity presents itself as the market rebounds from a correction.

Peaks & Troughts of Stock Market Since 1929

Data Source: YCharts 

Before you get completely bored, I’ll leave you with 2 more charts.

According to the Robert Shiller CAPE Ratio, the U.S stock market is very expensive, and valuations are higher than historical average.

The CAPE Ratio provides insight into publicly held companies’ financial performance and determining if they’re undervalued or overvalued. CAPE Price E10 Ratio

Data Source: Yale School of Management 

I’m not saying that a market crash is inevitable, but I am saying to plan for a long-term horizon with money in the market.

As you can see from the JP Morgan valuation and earnings measure below, earnings growth has been incredibly strong.

Yes, fundamentals supported this and the top 10 stocks in the S&P are close to 30% of the market but they contributed 34% earnings over the past year.

S & P 500 - Index Concentration, Valuation & Earnings

As always, if you would like to discuss your portfolio or re-visit your risk profile, please do not hesitate to contact us or your Hawaii Financial Advisor.

*Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. Investments and/or investment strategies involve risk including the possible loss of principal. For a complete description of investment risks, fees and services, review the Brookstone Capital Management firm brochure (ADV Part 2A) which is available from your Investment Advisor Representative or by contacting Brookstone Capital Management.

*The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. It is not available for direct investment.

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