The S&P 500 Stock Index has increased seven times and delivered an average annual compound return of more than 17% in almost thirteen years, from its closing low in the Great Panic of March 2009 to its most recent all-time high in January 2022.
At the same time, there was a dramatic increase in consumer inflation – larger than any increase in over 40 years. The Federal Reserve implemented the most significant interest rate spike in its 110-year history in response.
As a result, although many investors had been advised that this could never happen, a howling bear market affected both stocks and bonds.
In ten months, the S&P 500 went down 25% before slightly stabilizing and ending the year down a “mere” 18%. This made 2022 the S&P 500’s fourth worst year of the previous 50. The ten-year Treasury bond was down over 15%, making 2022 its worst year ever. The 60/40 portfolio, which many considered to be a safeguard against market volatility, had its worst year since 1937.
As all of this took place, 2023 entered the scene with its own numerous global events:
- Millions of migrants entered the United States illegally through its southern border, creating economic impacts and affecting the resources of numerous large American cities.
- In these cities, addiction and homelessness have reached unprecedented levels.
- As Iran moved towards nuclear capability, the Middle East descended into violent conflict.
- In response to the invasion of Ukraine, the West has engaged in a proxy war with Russia.
- Unless reformed, both Social Security and Medicare are continuing on paths to eventual insolvency.
- The United States’ national debt and budget deficit continue to increase at rates that are unsustainable.
- Middle-class households are experiencing substantial stress as inflation rates slow but prices remain the same.
- Single-family homes are not affordable for many people.
- With a presidential election less than a year away, serial government shutdowns continue to loom.
In light of these events, people who have already retired or who are saving for retirement are left with concerns about the stability of their investments. So, where do we find ourselves after this two-year onslaught of negative developments?
Optimistically, we are down only five percent from the all-time high. The S&P 500 currently sits approximately five percent lower than its high in January 2022. This statistic ignores cash dividends, which increased 11% in 2022 and are projected to reach a record high by the end of 2023.
One would think, given the litany of issues previously mentioned, that the mainstream equity market would be devastated. But importantly, the S&P 500, an index of the values of 500 of the world’s most successful companies, doesn’t seem frightened by global events. How these events will be resolved is yet to be seen, but the market itself shows no signs of a genuine crisis. As a final anecdote, I must add that in decades of investing, every time I began to believe that I knew something the market didn’t, it wasn’t the market that ended up being incorrect.
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