Thoughts on today's market
- Mike Brown
- Nov 12
- 5 min read
The following is a letter we recently wrote to our clients:
Dear Friends,
If you’ve been a client for any length of time, you know that we don’t make investment decisions based on market predictions. This is because: 1) we’ve yet to hear of anyone who’s particularly good at it; and 2) we don’t believe predicting the future is a necessity when it comes to financial success in the first place.
That’s not to say we don’t pay attention to market fundamentals, however, and when prices get way out ahead of those fundamentals, the risk involved with owning stocks increases. Whatever it eventually takes to bring the two back together isn’t always a pleasant experience.
Our friend Nick Murray points out that 40 years ago, the 10 largest companies in the S&P 500 accounted for about 10% of the index’s total capitalization. Twenty years ago, the concentration had grown to just over 20%. Today, the 10 biggest companies (just 2% of the 500) account for about 40% of the index. And the index continues to post new records despite tariffs, inflation, soaring government debt, and a weakening jobs market, not to mention the ongoing war in Ukraine.
None of this means that a market downturn is imminent. As economist John Maynard Keynes famously said, “Markets can remain irrational longer than you can remain solvent.” But perhaps now is a good time to recall the lessons we’ve learned from the past, as well as to preview the advice we will likely be giving you during the next downturn.
Five things to know about bear markets
Bear markets are defined by a decline of more than 20% in a major equity index, such as the S&P 500. They begin and end for reasons that appear different each time, and they vary in both length and severity.
Since 1950, there have been 11 bear markets in the S&P 500, or one about every seven years.
These declines have resulted in an average loss of nearly -35% and have lasted a little over one year.
It has taken slightly more than four years on average for the S&P 500 to make a full recovery (from peak to trough and back to the prior peak). The longest roundtrip (2000-2002) took nearly 10 years. (The good news is that in a typical full cycle, stocks are actually in recovery, i.e., rising, about three-quarters of the time.)
Yet over those 75 years – and through nearly a dozen bear markets – the S&P 500 has still been able to deliver total returns of +11.6% per year, including dividends.
Every one of these major declines has ultimately led to new, higher peaks. We believe this is because equities historically reflect the innovation, progress, and growth of the underlying businesses and the economy as a whole. For that reason, we view bear markets as temporary pauses in what has thus far been a permanent upward trend, not as the end of humankind.
(Data sources: Standard & Poor’s, Yardeni Research)
Five things to know about us
Of the 11 bear markets that have occurred over the last 75 years, Brown Family Wealth Advisors has been here to counsel our clients through the last four – which include two of the worst ever: the Dot-Com Crash of 2000-2002 (-49%) and the Global Financial Crisis of 2007-2009 (-57%). In other words, the next rodeo will clearly not be our first, and almost certainly it won’t be our last.
The guidance we plan to give you during the next bear market – whenever it happens – will be consistent with what we have said during the previous four:
We believe the chief risk of owning stocks is having to sell them in a sharply declining market. Given that it’s taken an average of five years – and in one case as long as 10 years – for the market to fully recover from bear markets, we recommend that you keep any money you plan to withdraw from your portfolio over the next 5-10 years in what we call the Reserve, in fixed-income and cash equivalents, which have historically been much more stable than equities over shorter time periods. Knowing that your withdrawal needs are covered for up to a decade ahead can give you the confidence to allow stocks time to recover.
Realize that we don’t invest in markets. We invest in high-quality companies. (See Nick Murray’s commentary that we just sent you in a separate email, which expands on this distinction.)
Instead of watching stock prices gyrate, we will urge you to focus on the income your portfolio is producing. In other words, take the escalator instead of the roller-coaster.
Avoid at all costs the temptation to act on the emotions you’ll be feeling the next time the market drops sharply, for at least two reasons: 1) If your goal is building wealth, panic selling halts the process of compounding, versus buying at low prices, which enhances it; and 2) Selling stocks shuts down the rising stream of dividend income that many retired investors rely on.
Selling stocks when they’re falling is the easy part. Knowing the best time to get back in is virtually impossible. There are no market-timers on the Forbes list of wealthiest Americans. For that reason, we believe the only way to earn the long-term return of equities is to own them in good times and bad. Thankfully, the bad times have historically been brief and temporary.
Again, please don’t infer from what you’ve just read that we think anything bad is about to happen – or that we should be making major changes in anticipation. Our job is not to predict an unknowable future, but to help you plan for it. And if your goals haven’t changed and the plan still works, there’s no reason to make changes in your portfolio beyond the fine-tuning that we consistently do.
Finally, just know that whatever might lie ahead, we will be right here to help you through it once more.
Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. No investment strategy can guarantee your objectives will be met. Past performance is no guarantee of future results. Every investor's situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment decision.
The S&P 500 is comprised of approximately 500 widely held stocks that is generally considered representative of the U.S. stock market. It is unmanaged and cannot be invested into directly.
Raymond James is not affiliated with Nick Murray.
