Time to Get Greedy 😈

Market Musings 5/18/2022

Quick thoughts on the markets and major portfolio news. Not on Ursa yet? Download Ursa from the App Store!

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S&P 500 creeping into bear market territory with likely recession near-term. While we’re not calling (nor expecting) a market bottom here, we do believe this is the time to start getting greedy.

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“Fearful when others are greedy, and greedy when others are fearful”

– Warren Buffett

A bear market is a 20% or more decline over an extended period typically at least two months. The S&P 500 has experienced a bear market 26 times since 1928.¹ The average market decline was -36% and average length was ~10 months. A bear market has led to a recession 9 times. While the average decline is similar, the average length extends to 17 months excluding 2 short-term market crashes in 1929 (Great Crash) and 2020 (#COVID19).² The S&P 500 is approaching a bear market down -19% down from an all-time high to start the year (as of 5/19).

While not quite in a bear market yet, we’re still well into correction territory (down >10%) and tech-heavy NASDAQ in a bear market already since April. Recent retailer earnings this week encapsulated the ongoing perfect storm of elevated #InflationFears costs, #UkraineCrisis supply chain disruptions and lingering global #COVID19 impact driving increasingly bearish sentiment and increasing #RecessionWatch odds. While a lot is still in flux, we do expect a short-term recession on the horizon as the Fed attempts to tame soaring inflation with #RisingYields.

So what does this mean for portfolios? As we highlighted in our Market Musings last week, we’re laser-focused on fundamentally strong investments with long-term time horizons to weather market down cycles. While we’ve made a few adjustments to our Recommended Stock List, largely our investment theses have remained intact. Our list’s average forward P/E ratio is 16x at a slight discount to the S&P 500’s 10-year historical average of 17x. While we recognize the near-term volatility is downright scary, we see a long-term opportunity to add to portfolios at more attractive valuations.

So, why invest now if a recession is likely coming? First, markets are typically leading indicators with expectations largely already priced-in. Please note this doesn’t mean markets have bottomed, but the current expectations around #RecessionWatch odds likely are already largely factored in. Second, guess what follows bear markets? Bull markets are 20% or more increases from the lowest price of the preceding bear market. Historically, the average bull market increase was +114% and average length was ~2.7 years¹－much higher returns and longer than bear markets! While past performance is no guarantee of future results, we believe reviewing previous market cycles provides insight into the benefits of long-term investing.

To recap, the S&P 500 is creeping into bear market territory with a likely recession in the near-term. As THE value investor Warren Buffett once said be “greedy when others are fearful”. While we’re not calling (nor expecting) a market bottom here, we do view the market pullback as a significant opportunity for investors with long-term horizons to add to portfolios (or setup recurring deposits and take advantage of dollar cost averaging). Nobody can perfectly time the market, but we do believe this is the time to start getting greedy. 😈