Let’s talk about stock market volatility because we have seen some extraordinary volatility lately. Let’s start by recalling the basic axiom of investing in common stocks: If you want the so-called equity risk premium, then you should expect stock market volatility and, in fact, welcome it. It’s completely counterintuitive.
Stocks rose sharply Friday and for the week. Stock values have come down since Russia invaded Ukraine, and the price of the Standard & Poor’s 500 is now in line with its long-term compound annual growth rate of 7%. This indicates stocks are not overpriced like they were in the tech-stock bubble, which began in 1997 and peaked in 1999 and 2000 when the S&P 500 was out of line with the average annual 7% long-term growth trend.
The good news is that the Federal Reserve’s preferred measure of inflation may be bottoming, but the bad news is the American consumer’s purchasing power declined by -4.8% in the 12 months ended August 31.
It is a pivotal moment in economic history. The dust is settling from the economic shock caused by the Covid-19 pandemic. Meanwhile, the post-pandemic inflation crisis and Russia-Ukraine War linger on, creating stock market uncertainty, fueling fears of an economic downturn, and, in some quarters, of a worldwide financial disaster. So, the latest data on the service sector of the U.S. economy is indeed reassuring.
Securities regulators require financial advisors to state in their public statements that past performance is not indicative of future results because investing is complicated, and nothing is guaranteed. Ironically, however, a mountain of evidence exists showing that achieving investment success depends largely on understanding lessons from the past.