April 29, 2024
Risk 🔗 Reward
Dear Reader,
‘Investors are beginning 2024 at a precarious point.’
So begins Morgan Stanley’s 2024 U.S. Stock Market Outlook.
The carefully-worded report lays out three main reasons why investors need to approach the market cautiously this year:
- U.S. stocks ended 2023 ‘overvalued’.
- Overly-optimistic earnings forecasts & tapering economic growth.
- Markets overestimating Fed rate cut agenda.
How, exactly, does Morgan Stanley recommend readers of its sage wisdom act on these bleak observations?
‘Balance expectations and portfolios by buying the equal-weighted S&P 500 Index or actively favoring value-style stocks, with a focus on financials, industrials, utilities, consumer staples and healthcare.’
Basically, buy the market, or buy a bunch of stocks from those five sectors.
In this email, we’re going to do two things:
First, let’s check in to see how markets are tracking since setting off from Morgan Stanley’s ‘precarious point’ on January 1.
Second, we’ll show you a few pieces of information that help long-term investors avoid getting caught up, bogged down, or bothered by reports such as that outlined above.
Stocks in 2024: The story so far
So far, four months into 2024, Morgan Stanley’s predictions of ‘an average year for markets’ appear to be wide of the mark.
The S&P 500: Up 7.5%
Source: Google Finance
NASDAQ 100: Up 7.8%
Source: Google Finance
Of course, these performance charts in no way tell us what might come next for the S&P 500 and the NASDAQ.
But, consider this:
Going down while going up (and vice versa)
Ben Carlson is the Director of Institutional Asset Management at Ritholtz Wealth Management (who manage about $2.5 billion of client capital).
Ben wrote a fantastic post last year titled Even When the Stock Market Goes Up it Still Goes Down.
In his post, he makes the case that investing is pretty much always confusing in the short term.
Even when stocks are trending higher, they can and do crash lower, or ‘draw down’.
Equally, when stocks are trending down, they can produce short-term price increases.
Ben also notes that since 1928, the S&P 500 has gained 20% or more in a year 34 times.
That’s 35% of the years up to and including 2023.
Of those 34 years, the index has corrected by 10% or or more in 16 of them.
In other words, nearly half the S&P 500’s strongest annual performances include a double-digit correction/drawdown.
Here’s the proof:
In Ben’s words:
‘Risk and reward are attached at the hip when it comes to investing. One of the reasons the stock market provides such lovely returns in the long-run is because it can be so darn confusing in the short-run.
‘You don’t get the gains without living through the losses.’
We’ve written before in The Benchmark about so-called ‘dangerous short-termism‘ — the phenomenon that makes people, and investors, struggle to see beyond events and concerns that are immediately in front of them.
What Ben Carlson writes about living through the losses to get the gains, this next chart illustrates (over the much longer term).
Here’s the Dow Jones Industrial Average from 1915 to March, 2024:
https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart
As you can see, the index’s 2,217% return over the more than 100 years has not come without multiple massive crashes and downtrends.
The Great Depression crash and the protracted bear market in the 1970s stand out as the most dramatic drawdowns.
If you’re a newer investor, and you’re yet to develop the long-term view common to history’s most successful and wealthy investors, annual market forecasts like Morgan Stanley’s might scare you.
But as Ben Carlson shows, billionaire Kenneth Fisher’s statement that ‘time in the market beats timing the market‘ is a good general approach to the stock market.
Before we hammer on the point too much (although I’d argue it’s always worth considering such proof and observations, especially when dealing with difficult ‘drawdown’ episodes along the way), here’s one last visual for your consideration:
This one’s from Long Term Mindset writer Brian Feroldi:
Decades > Years > Months > Days
Morgan Stanley and other Wall Street firms can predict, forecast and prognosticate all they want about what the market might or might not do.
But the reality is — for those looking to build wealth in the markets over the long term, at least — that what happens this month, or even this year, is of little relative consequence when you have your sights set on a bigger picture far beyond the short or medium-term horizon.
With ups come downs, and as Ben Carlson says, risk and reward are joined at the hip.
That’s it for this week’s The Benchmark email.
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Invest in knowledge,
Thom
Editor, The Benchmark
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