If you ask 100 different financial “experts” about future stock market performance, you’ll get 100 different opinions. Most will be wrong, but some, by sheer luck, will be correct (luck is often confused for skill). Investors often rely on expert opinions on what to do with their investments, especially in volatile markets like we are enduring today. Historical predictions prove that well known financial experts don’t know much more than you do:

1) August 1979, Business Week, “The Death of Equities”. This is one of the most infamous articles ever written about the stock market. Over 40 years ago this story was written about how inflation was destroying the stock market. An excerpt from the article stated “For better or worse, the US economy has to regard the death of equities as a near-permanent condition-reversible someday, but not soon.” As we all know, equities survived and appreciated 8,000% over the next four decades.

2) September 1998, Fortune Magazine, “The Crash of 98: Can the U.S Economy Hold Up?” Columnist Joseph Nocera said, “This time it is different. This time the market won’t be so quick to bounce back. Who can look at the world and not conclude that things have changed dramatically?” As we now know, this column did not age well for Nocera. To quote the famous John Templeton, the four most dangerous words in investing are “This time it’s different.”

3) January 1987, Ravi Batra book titled “The Great Depression of 1990”. You can probably guess what the book was about just from the title, and of course, the US stock market averaged an 18% annualized rate of return during the 1990’s. Pretty good for an economic depression!

It’s important to remember that pessimism is poison. New uncertainties pop up regularly, and markets have dealt with these uncertainties quite well despite what you read. If you let fear drive investment decisions you’ll likely end up burying your money in your backyard (which isn’t a sound investment strategy!). The best course of action is to develop an investment plan and stick to that plan persistently. Most importantly, focus your time and energy on factors you can control; how much risk to take with your investments, what mix of investments, and how much the investments cost to name a few.

The most commonly accepted definition of a bear market is a 20% decline in value from the last market high. The S&P 500 has crept into bear market territory on and off so far in 2022, and it’s impossible to know for certain when things are going to turn around. However, when dealing with times that may feel uncomfortable in the stock market, it’s important to think about what we do know:

Bear Markets come and go quickly

From 1926-2021, the S&P 500 has experienced 17 bear markets. The average duration of each bear market was roughly 10 months. For long-term investors of all ages and stages of life- 10 months is a relatively short period of time in the grand scheme of things, and you are rewarded for staying invested during periods of uncertainty. Over the same period (1926-2021), the S&P 500 had an annualized return of ~10.5%.

Markets bounce back strong

An example we can all remember- the bear market that came with the start of the pandemic had a drop of over 20% by mid-March of 2020. Those who stayed the course for the remainder of the year saw their full account balances come back and continue to rally another ~20% by the end of the year.

This is not an uncommon trend. From 1926-2021, the average 1-year return following a 20% market decline was ~22%, the 3-year following cumulative return was ~41%, and 5-year following cumulative return was ~72%. The graph below shows strong returns following 10% & 30% drops as well:


Bear markets are a part of being a market participant, and the only way you can hurt yourself in the long run is by making an emotional decision. At Rockbridge, we are advising all clients to stay the course, as we always have, and will continue to stick to our disciplined approach.

If you are still feeling uncomfortable or uncertain with your financial plan, schedule a time to chat with a Rockbridge advisor today!

There’s been a lot of talk about recessions lately: Whether one is near, far, or perhaps already here. Whether we can or should try to avoid it. What it even means to be in a recession, and how it’s related to current market turmoil.

To put market and recessionary concerns in perspective, it might help to describe six ways a recession resembles a bad mood. There are some intriguing similarities!

1. There Is No Precise Definition.
We all know what a bad mood feels like. But there is no clear definition for a nebulous mix of real and perceived setbacks, and how they’re going to affect us.

Likewise, there is no single signal to tell us exactly when a recession is underway or when it’s over. Instead, recessions can trigger, and/or be triggered by a number of conditions connected in various fashions and to varying degrees. These usually include a declining Gross Domestic Product (GDP), along with rising unemployment, sinking consumer confidence, gloomy retail forecasts, disappointing corporate balance sheets, a bond yield curve inversion, stock market declines, and similar combinations of objective and subjective events.

In the U.S., the National Bureau of Economic Research (NBER) defines a recession as follows (emphasis ours):

“A recession is a significant decline in economic activity that is spread across the economy and that lasts for more than a few months.”

Rather vague, isn’t it? That’s intentionally done. Similarly, the World Bank Group has stated, “Despite the interest in global recessions, the term does not have a widely accepted definition.”

2. You Usually Can’t Spot One Except in Hindsight.
How do you know when you’re in a bad mood? Often, you don’t, until you’re looking back at it.

Recessions are similar. Since a widespread downturn must linger for a while before it even qualifies as a recession, the NBER only declares one after it’s underway. For example, in July 2020, the NBER announced we’d been in a recession for two months between February–April 2020. This was triggered, of course, by the abrupt arrival of the global pandemic. It was the shortest U.S. recession to date, and already over by the time we officially acknowledged it.

3. Sometimes, We Get Stuck for a While.
Hopefully, your bad moods come and go, resulting in more good times than bad. But sometimes, one misfortune feeds another until you feel gridlocked. It may take a while before improved conditions, a more upbeat attitude, or a blend of both help you move forward.

In similar fashion, recessions can become a self-fulfilling prophecy. As Nobel Laureate and Yale economist Robert Shiller describes, “The fear can lead to the actuality,” in which (for example) economic conditions might feed inflation, which inverts the bond yield curve, which signals a recession, which shakes corporate and consumer confidence, which leads to unfortunate reactions that further aggravate the challenges. And so on. When this occurs, a recession and its related financial fallout may last longer than the underlying economics alone might suggest.

4. They’re Inevitable.
It’s never fun to be in a bad mood, but we can all agree they’re part of life. It would be unhealthy, exhausting even, if we were endlessly giddy every minute of every day.

Similarly, nobody celebrates a recession. But it helps to recognize they aren’t aberrations; they are part of natural economic cycles. And while they may not be anyone’s favorite tool for the job, they can sometimes help rein in runaway spending, earning, and pricing for companies, consumers, and creditors alike.

For example, in our current climate, we may enter into a recession (or already be in one) as a byproduct of the interest rate increases, aimed at warding off rising inflation, amidst the backdrop of lingering COVID-19 supply side issues and global economic sanctions against Russia. If we can avoid a recession, all the better. But if it’s going to take a modest one to reduce inflation, it may be the preferred, if challenging choice at this time.

5. Experience Helps.
When we’re youngsters, we have little perspective to help us realize we won’t be miserable forever just because we’re unhappy in the moment. No wonder we give it our all, every time. As we mature, we learn to temper our moods, and/or seek support if we do get stuck in a rut.

The same can be said about recessions, and similar challenges. It’s been more than a decade since the Great Recession; and more than 40 years since the U.S. last experienced steep inflation. As such, many investors have had little first-hand experience managing such turbulent times.

It may help to acknowledge we’ve been here before. While commenting on the most recent two-month recession in 2020, “A Wealth of Common Sense” blogger Ben Carlson lists nearly three dozen distinct U.S. recessions dating back to the 1850s, with an average length of 17 months. Some were considerably longer. We endured a series of years-long recessions during the era of the Civil War in the mid- to late-1800s. Then there was the Great Depression from 1929–1939.

It also helps to remember: Every recession has eventually ended, with economies and markets thriving thereafter. As Dimensional Fund Advisors shows us, one-, three- and five-year average cumulative returns after significant U.S. stock market declines dating back to July 1926 have all been positive, rewarding investors who placed their faith in future expected returns. Since markets are ultimately driven by the underlying growth in global commerce, we can expect similar aggregate performance moving forward in domestic and international markets alike.

Consider these words of wisdom from one of the most experienced investors of all, Warren Buffett, in his 2012 Berkshire Hathaway shareholders letter (emphasis ours):

“Periodic setbacks will occur, yes, but investors and [business] managers are in a game that is heavily stacked in their favor. … Since the basic game is so favorable, Charlie [Munger] and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of ‘experts,’ or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.”

6. You Can’t Change Others, But You Can Change Yourself.
When you’re in a funk, it doesn’t matter whether it’s due to one or many unfortunate events, or “just because.” There’s ultimately only one person who can change your mood: yourself.

The same is true for your response to recessions, bear markets, and other external events standing between you and your financial wellbeing. Life is filled with causes and effects over which we have no control, especially with respect to our investments. And yet, there are many small, but mighty acts we can take to contribute to the positive outcomes we wish to see in our homes, our nation, and the world. We can manage our household budgets. We can show up for work (or perhaps volunteer in retirement). We can be loving family members, engaged citizens, and generous donors to the causes we hold dear.

And, we can invest wisely. This means taking charge of your personal wealth by focusing on the drivers you can control, and ignoring the greater forces you can’t. For example:

• We can’t avoid recessions. But we can channel our inner Warren Buffett to look past today’s risks, and retain an appropriate amount of market exposure in pursuit of our long-term financial goals.
• We can’t avoid bear markets. But we can avoid generating unnecessary losses by panicking and selling low in the middle of one.
• We can’t avoid inflation. But we can establish a thoughtful budget to track our income and spending, with a plan in place for making adjustments as warranted.

Last and hardly least: It’s very hard to change the world. But you can always change yourself. Sometimes all it takes is a shift in sentiment to seize your next best move. As always, we’re available to assist with that in any way we can. How can we be of service to you and your family? Don’t hesitate to be in touch.

Recent headlines have been dramatic as “Inflation Soars to Highest level in 40 Years!” and “Stocks Plunge to 2022 Lows!” It sounds like the authors are all shouting, and we should really panic. It feels like we should “do something” but let’s take a step back from the headlines, and put today’s market in perspective first.


1. Stocks are in bear market territory if we use the standard definition of a 20% drop from market peak. In fact, the large cap growth sector tracked by Morningstar is down over 40% so far this year. On the other hand, the S&P 500 first reached current levels at the end of 2020, a mere 18 months ago, when the headlines said “S&P 500 Reaches New All-time Record High!” Again, these were delivered with shouting and exclamation points, inducing panic for Fear of Missing Out (FOMO) as people were bidding up the prices of Tesla, and Peloton, and crypto currency. As of May 16, the index is back to where it was 18 months ago, but the emotion is to bail out before it drops lower. Stock markets are volatile, we should expect these kinds of swings from time to time, and trying to predict them with any consistency is a fool’s errand.


2. Total Bond Market funds are now down about 11.5% year to date. This is explained by the dramatic and unexpected increase in interest rates, which are now about 2% higher than at the beginning of the year. The $1.00 you had invested at the beginning of the year was earning 1.25% per year. It is now worth $0.88 and earning 3.25%. The average maturity of the fund (measured by duration) is over six years. It is not surprising that earning 2% more over six years would earn back the 12% lost, and you would be back where you expected to be at the beginning of the year.


3. The odd sort of silver lining here is that the change in interest rates is primarily due to an increase in expected real returns, and not just due to higher inflation. In fact, despite recent record levels of inflation, the expectation for average inflation over the next five years is about the same as it was in January, so the expectation for higher fixed income returns is “real”. This signals a return to a more normal situation where long term savers earn something greater than inflation, which was not the case through much of the pandemic recovery period.


4. Things could get worse before they get better. In hindsight it is easy to agree with the people who said the economy was over-stimulated during pandemic recovery. It has led to record low unemployment, and resolved the Fed’s inability to push inflation above 2%. Unfortunately it is now WAY above 2%. Jerome Powell, Chair of the Federal Reserve is the person responsible for finding that just right balance between full employment and stable prices. Unfortunately, his tools are limited. “We don’t have precision surgical tools. We have essentially interest rates, the balance sheet and forward guidance and they’re … famously blunt tools,” Powell said at a recent press conference. It is quite possible that monetary policy pushes the economy into a recession in an effort to bring down inflation.


5. This is a good time to assess your risk tolerance. It is easy to take risk when it feels like markets only go up. We are now preparing to grit our teeth and rebalance by selling some fixed income securities and buying more stock. If that feels really scary, we should have a conversation about your investment time horizon, and appropriate risk tolerance.


In summary, it is a good time to ignore the headlines, reassess your investment horizon and appropriate risk tolerance, and continue to expect positive long-term returns for taking diversified investment risk.

Stock Markets

Although rebounding lately, all markets are down year to date. Since December stock markets are off more than 10%. Tech stocks are especially hard hit – an equally weighted portfolio of the largest domestic tech stocks (Apple, Microsoft, Amazon, Google, and Facebook) is off 25%. The premium to value markets, domestic and international, reemerged with year-to-date premiums of 9%.

These results are consistent with a murky future as markets seek to sort out the impact of the ongoing War in Ukraine and the Fed’s ability to thread the needle of tamping down inflation without triggering a recession. While stock prices are established by traders expecting positive results, there is no doubt prices will be volatile throughout this process. Going forward there will be plenty of surprises impacting stock prices one way then another. Yet, the observed price best reflects the news driving these surprises. Consequently, while difficult, it is especially important to maintain established commitments to ensure expected returns are realized.

Inflation is a concern. Over the past twelve months the Consumer Price Index (CPI) is up 7.5% – levels not seen since the early 1980’s. Whether this spike reflects government stimulus spending, or shortages due to disruptions in global supply chains, or some combination is not clear. The Fed has been increasing interest rates in response. Its success at bringing down inflation without triggering a recession remains uncertain.

Over longer periods, domestic market returns stand out, especially in large cap markets which reflect the extraordinary results of large tech stocks. Ten years is not a long time in markets. While these relative returns are useful to understanding short-term results in diversified portfolios, historical results are not useful for predicting the future. Periods of significant volatility oftentimes brings short-term regrets, which is OK if it doesn’t affect long-term decisions.

Bond Markets

Today’s pattern of bond yields versus those at the beginning of the year shows a marked increase at all maturities. Bond prices and returns move inversely with yield changes. The longer the period to maturity, the greater the move. This year-to-date upward shift helps to explain recent negative bond returns.

Yields are driven by interest rates, risk premiums and expected inflation. These factors shift through time resulting in changing yields and volatile bond market returns. If we isolate the effect of interest rates and risk by looking at nominal versus real Treasury yields of like maturities, then we have a view of expected inflation implied in today’s yields. This analysis produces expected inflation over the next five years of 3.0% and 2.6% over the next ten-years – not only different from what we have been observing, but also closer to the Fed’s objectives.

Uncertainties associated with activities of the Fed include (1) how fast and by how much it will increase interest rates to contain inflation and (2) how it will deal with the massive amount of Government securities on its balance sheet. At its recent meeting the Fed increased interest rates ¼%, announcing several more increases going forward. Its goal is to bring down inflation without triggering a recession. Expectations of the Fed’s success in achieving this goal will be reflected in both stock and bond markets going forward.