When will the market recover? When will inflation fall? Will interest continue to rise? These are the three questions clients ask about the current state of the economy. These are reasonable questions, but I don’t have any idea. I do have, however, 100 years of data to support my thesis that stocks will eventually recover and inflation will subside.
Since 1926, the S&P 500 has averaged 10.07% per year despite wars, recessions, corrections, and politicians. The market has risen approximately three-quarters of the time, or three out of every four years, which means one-quarter of the time it falls. The S&P 500 has a winning percentage of 750%. The New York Yankees are considered the best major league baseball team in history, winning 27 World Series titles, and their winning percentage is only 570%. If the market finishes in negative territory this year, it will be the thirteenth time in the last fifty years, in line with historical averages. Since 2015, the S&P 500 has lost money in four calendar years, including this year. In other words, it made money 73% of the time. I don’t know when the market will recover, but I like my odds.
Inflation has averaged 3.26% dating back to 1914. In the past, an increase in inflation resulted from an event like WWI, WWII, or the Arab Oil Embargo. I believe the recent spike is due to COVID, supply chain issues, and our government’s response to the shutdown. After each spike in inflation, it started to decline almost as fast as it climbed. We are already seeing signs of inflation easing at the gas pump, shipping containers, and used-car prices.
Interest rates continue to rise in response to rising inflation. The one-year US T-Bill yields 4.19%; last year, the yield was .09%, an increase of 4,555%. Since 1871, the average long-term interest rate has been 4.49%. And from 1871 to 1967, the rate mostly stayed below the average. It wasn’t until 1967 that rates climbed significantly, rising from 4.59% to a peak of 15.32% in 1981. After the peak, interest rates fell 93% from 1981 to 2020. In 1994, the Federal Reserve increased interest rates by 100% from 3% to 6% before lowering them in 1995, which started an epic run for stocks where they soared 226% from January 1995 to April 2000.
I believe in reversion to the mean, and I expect stocks to rise and inflation and interest rates to fall, but I don’t know when it will happen, but I have one hundred years of data on my side.
History never repeats itself, but it does often rhyme. ~ Mark Twain
October 7, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Though the Yankees are the winningest team in MLB history, I expect the Dodgers to win this year’s world series.