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Klingman Insights
March 14, 2017
Dear Valued Client:
Sitting in my office in the middle of a blizzard seems like a good time to reflect on some important recent anniversaries, as well as the current state of the equity markets and the global economy. It was eight years ago last week (March 9, 2009) that the S&P 500 index reached its bottom during the Great Recession. Since those darkest of days the index has returned 290% (including dividends). I remember well waking up at 3:30am day after day that month and coming to the office to follow markets and communicate with clients. And it was just over one year ago today on February 11, 2016 that stocks started the year by declining 11%, appearing to foreshadow a global recession. Over the past 13 months, stocks, as measured by the S&P 500 index, have returned 33%. If there is anything that we have learned as long-term investors it is that it is impossible to successfully predict market tops or bottoms, despite the efforts of many of the “talking heads” featured in the press (of which I am often one).
The only clear lesson is that patience and discipline are the keys to long term success. At market bottoms it is natural to feel the fear and anxiety and the desire to “just get out”. This is when sticking to our strategic asset allocation and long-term financial plan is most critical. On the other hand, at market tops, optimism and euphoria are widespread and almost all news is viewed as good. At these times we also need to remain disciplined and consistent with our long-term plans and not overreach for returns.
Although we continue to be positive on global equities, particularly compared to the alternatives in fixed income and cash, it is important to recognize that valuations are relatively rich and we have experienced well below historic volatility over the past year. Corrections in the equity markets, as reflected by a decline of 10% or more, and bear markets, reflected as a decline of 20% or more, are common and are part of the economic concept of the equity risk premium: historically investors in equities are rewarded with higher long-term returns for tolerating increased volatility. It has been 13 months since we’ve had a correction and over 8 years since we’ve had a bear market (although we had a 19% decline in 2011). While we are not saying that such events are imminent, it is important to understand that they are part of the investing process. We often refer to this as a “lifeboat drill”: During periods of good markets and calm seas it’s important to remember how we should react when volatility returns and the seas get rough.
Now back to the blizzard …
Gerry