Burt White: 'Volatility Is a Fee Worth Paying'
3. What chance of a recession do you think there is today and why, and to what extent has the (equity) market already discounted a recession?
Recession risk has risen to approximately a 1 in 4 odds but is not our base case for the next 18 months. We believe that the Fed can achieve the elusive “soft landing,” especially given the attractive balance sheet positions of both households and businesses, the overall health of the banking system, the best labor market in a generation, and the continued relatively strong spending by consumers.
When trying to assess the likely downside of a market, one of the key questions to figure out is whether we are in a recession or not. While this current market volatility is the eleventh bear market since 1950, it’s only the fourth to occur outside of a recession.
This non-recessionary characteristic is a vital factor, as these versions of bear-market periods are usually shallower and lead to a swifter recovery than the majority of declines that occur during recessionary times.
For example, bear markets that occur outside of recessions average a 28% decline versus the 39% average decline during recessions. With this current stock market volatility already pricing in the majority of the typical non-recessionary bear decline, cautious optimism remains that the market is approaching a likely bottoming level.
4. Do you think the markets are oversold, and where do you see the major indexes ending 2022 (Dow, S&P, Nasdaq) and why?
From a technical analysis perspective, it’s hard to say that stocks are still oversold given the sharp bounce back over the last week. But they certainly have characteristics of presenting attractive long-term appreciation opportunities.
For example, just a few trading days ago (June 17), only 1 in 50 stocks were above its 50-day moving average but that has improved now to 1 in 5. But that means that 80% of names still are at deep discounts and offer potential for long-term, patient investors.
We see the market posting a second-half rally, like it does in most midterm election years. In fact, over the four year presidential cycle going back to 1950, the fourth quarter of the midterm election year, which is this year, has kicked off historically the best period for stock performance.
Things are gearing up for volatility through the summer and a potential second-half rally that could propel stocks to re-trace most of the 2022 losses by year-end.
5. What should advisors be telling clients at midyear?
Just remember that the market, like most things in life, is more fragile in the short run than we would ever wish, but much more resilient over the intermediate/long run than we give it credit for.
Every single correction, bear market, pullback, drawdown, and recession in the history of the stock market was fully recovered. Need some evidence? All-time highs are just months behind us from the start of the year. This correction also will be fully recovered, just like its previous friends.
The reality is that markets are built to recover from bouts of volatility and, despite periods of concern, stocks have risen in 34 of the last 40 calendar years.
Volatility is what grants markets its return and opportunity. Markets generate wealth over time but it’s the uncertainty and volatility that grant it this upside — essentially the reward for the volatility fee.
In fact, 2021’s nearly 30% advance by stocks would never been possible without the volatility that happens in years like 2022. Or, as Morgan Housel states it, everything nice has a price. Volatility is a fee worth paying.
(Pictured: Burt White; Image: Twitter)
