Focus On What You Can Control

SAS Financial Advisors, LLC |


Reminder: focus on what you can control. Markets are one area that we cannot control. Look at this week so far: the first two days of this week we had two of the biggest market gains of the year after a miserable market decline for September. Markets are not under our control.


Regarding market behavior, what we can control is our response to market moves. Emotions do not play an adequate role in making decisions about markets. Emotions are appropriate in relationships, family, sometimes work, leisure activities and more, but are not as effective for the markets. We are not suggesting ignoring markets. Portfolio investments should reflect overall life goals over time. Unless your life changes, your portfolio should not change very much except to reflect changes in markets that present better options than when you set your allocation. For instance, with interest rates increasing dramatically from historically low rates, we have been moving fixed-income funds from higher risk higher yield securities to safe fixed-income investments like US Treasuries. 


After the financial meltdown in 2008-9, the Federal Reserve lowered the Fed funds rate to zero in order to encourage investors to put their money in higher-risk securities like stocks. Inflation was persistently low, so the Fed was successful in leaving few choices for investors to receive a competitive rate of return. Although not in a straight line the stock market recovered all its 2008-9 losses and in fact returned 200-300% over the next 11 years.


Covid caused another brief recession with a significant market bounce back. The most important variable was to keep emotions out of market decisions. Unless your life changes, do not sell. However, during 2022 we have inflation returning, interest rates increasing at a historic rate, and uncertainty about the economy. This is a time to lower risk especially since there are opportunities to accomplish that. 


What are we looking at in terms of expected returns for the next 10 years?

  • Indicators like the 10-year Shiller price-earnings ratio are still at a level that says we should expect lower rates of return than in the past 10 years.
  • Inflation is lowering the real return-investment returns minus the inflation rate-to less than zero.
  • What are markets telling us about inflation over the next 5 years?
  • I have been using this indicator to make sense of the Treasury yield curve which has been persistently inverted and continues to be.
  • The 5 years expected inflation rate is 2.18%.
  • Clearly, the current inflation rate is significantly higher but if the inflation rate falls that would certainly be a positive factor in market performance.
  • Also, bearish individual investor sentiment remains near an annual high.
  • Does this mean all those investors who were going to sell have already sold? Maybe.


More good news and bad news. The labor market is beginning to do what the Fed wants it to. The Fed would like the job market to cool without many Americans losing their jobs. That is exactly what is happening at least recently. As of Tuesday’s report, job openings fell but fewer than 1% of Americans were laid off. The Fed is speaking loudly expressing no intention of slowing down rate increases but that can change.


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