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Economic pain continued during the third quarter as we churn through a bear market in the equity and fixed income markets.  So far, this bear market has followed the script of past bear markets pretty closely.  Both stocks and bonds rallied during July and August, leading some pundits to declare the bear dead and cheering on the new bull.  To quote Mark Twain, reports of the bear’s death have been greatly exaggerated.  Renewed selling in September has shown that the bear market still has some bite.

There are a multitude of issues happening around the world that are contributing to our economic and market troubles, many of which we have discussed in previous letters.  It is impossible to watch the news without hearing about inflation.  Inflation is insidious and hurts both stock and bond investors.  It’s worth noting that the inflation we are currently dealing with is a global problem, not just an American problem.  Almost all central banks in the developed world are raising interest rates in an effort to bring down inflationary pressures.  A subplot to the inflation drama is a severe labor shortage in the U.S.  This puts upward pressure on wages, which adds to inflation.  A related subplot is the easy money during the pandemic.  While we won’t debate the need for government assistance, when the government borrows money to give away, it is certainly a challenging economic exercise.  In the midst of these challenges, a war in Europe beginning earlier this year just made a bad situation worse.  Disruptions to the oil markets have always caused economic pain, and Russia is a leading oil producer, supplying most of Europe’s energy.

All these things happening when the stock market is near record high valuations and interest rates are near zero, market corrections can be swift and severe.  This is what we are seeing now.

We find it useful to look at the current bear market relative to historical bear markets. (A bear market is a 20% decline in the market) Since the end of World War 2, this is our twelfth bear market.  We have also had another four corrections of over 19%, which just miss the bear label.  The average length of the previous eleven bear markets has been sixteen months, with an average decline of 35%.  On average, it takes just over two years to recover bear market losses.  Given our extremely high valuations, it would not be unexpected to see a more severe sell off than average just because the market was so expensive to begin with.

Bear markets and occasional painful sell offs are a normal part of investing.  Even though they are relatively frequent, they are the part of investing nobody likes.  Keeping a long term time horizon helps prevent making short term changes that can dramatically damage your financial future.  Things may get worse before they get better (though they may not), but they will get better.  Never hesitate to call us to discuss your investments.

Wabash Capital