Physicians' Guide to Wealth

A guide for anyone pursuing financial independence

This Too Shall Pass

Feb 23, 2022

Last week, we outlined how the Bureau of Labor Statistics has been tracking productivity and what that could potentially impact your investments. I had a nice post teed up to carry on with that theme, but a few events happened this week that I thought deserved the spotlight.

What happened? Here is a brief timeline: Russia has continued to make additional moves to invade eastern Ukraine, specifically the Donbas region. By formally recognizing the territory as independent, Russia is now “on a peace mission” to the region. A clever and obvious way to invade Ukraine that is generating a lot of economic pushback from Ukraine’s allies. Some say this is essentially Putin’s invasion of playbook Georgia all over again (I hope not). So far, President Biden and his administration will levy sanctions on Russian banks and individuals in response. Germany said it halted moves to open the Nord Stream 2 pipeline. The EU is imposing sanctions on most members of Russia’s Duma. I am not a geopolitical expert, but I don’t have to be to get an understanding of what’s going on. Essentially, Russia is using Ukraine as a proxy for war with the West and its allies. The more it pushes into Ukraine, the more it tests what the response will be. If you remember the Tariffs of the Trump era, this may end up being Biden’s version of the same, with trade sanctions abound.

Stocks prices don’t favor trade sanctions or threats of war in aggregate, especially during a supply-challenged world. With the Ukraine situation looming in the backdrop, stocks continued to slide during today’s trading session, with the S&P 500 closing in a technical correction range of 10% below all-time highs (purple line). Mid-caps (orange line) and small caps (blue line) were already there.

That doesn’t look too terrible. It’s bad, but not 2020 bad. Not 2013 bad. Certainly not the start of 2016 bad *gulps*. The drawdown table below was created after Friday’s close and provides a better view of what’s happening under the hood (data via Charles Schwab and Bloomberg).

While the S&P 500 was down 9% from its high point on Friday, more than half of the companies inside the index were down more than 20% from their high points. That’s most constituents inside of a technical bear market. Looking to tech stocks at the Nasdaq, nearly half of those 100 stocks are at least 46% off their previous high point in the last year.

What’s different between the current correction and the COVID crash in 2020? The COVID crash lasted only 23 days; this current correction has already passed at 34 trading days. Last year, we saw more than 60 all-time closing highs for the S&P 500; this year has only seen one (the very first day of the year). Is this normal? Should we be worried about a much larger slide in stock prices?

I don’t think so, and here are two reasons why. The first is that 10% drops have happened roughly every two years on average since 1950. We just came off the heels of two incredible years for stock market returns; giving back some returns is how it works.

Here is a good chart that I saw today from a friend. It shows every 10% or more drop in the stock market since 1950 highlighted in grey, with the overall index price change on the green line.

Sometimes we need to just zoom out a bit. Not convinced? Here is another chart that paints a similar story. The blue bar is the return for the corresponding year, with the red dot being the max correction for that year. Every year has a red dot, but not every year has a blue bar in the negative.

Obviously, there is a lot of year left, but it would be hard to imagine that we don’t hit another all-time high by the time the calendar turns over (remember, last year we hit 60!).

What Does This Mean to Me?

There are a lot of reasons to be worried right now. Inflation, Russia using Ukraine as a proxy to go to war with the West, the Fed raising rates, labor markets, supply chains, a pandemic that seems to never want to end, the market during a correction. I get it. However, the very worst thing that an investor can do during a correction is to try and time the market, abandon their investment plan (or try to create one on the fly), try to outsmart the market (time the market), or watch way too much CNBC. While the current events may be new, seasoned investors have been here before. The one constant that remains is human behavior. Having a financial plan and investment strategy that is unique to you is the best hedge for all these conflicts that come our way. This too, shall pass. We don’t know when, but if more than a hundred years of data is any clue, then it’s not a matter of if we will continue to new highs, but a matter of when.




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