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This Time is Not Different, It's Average

Examining history often gives us a better perspective on current events. When doing so, we as investment professionals recognize that current economic conditions and market behavior are actually “average” – nothing abnormal or unusual. Economies are influenced by human behaviors and collectively our behaviors are predictable and repeatable, therefore historical trends and averages are great guides to understanding our future direction.


History illustrates that over the past 42 years, the average low point of the U.S. stock market in a given year is 14%, which is about where the S&P 500 stands as of this writing. While news channels will look to garner your attention with extreme headlines on the “worry du jour”, most of the economic noise is simply average, and yet another predictable outcome of collective human behaviors.


“The investor who says, ‘This time is different,’ when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing.”

– Sir John Templeton




Wall Street and Main Street: What is the Connection?


One of the big lessons in better understanding markets and investing is how Wall Street and Main Street reflect upon another. Today one might ask, “Why has Wall Street discounted the prices of stocks 14% since January?” when on Main Street, we see high gas prices, help wanted signs, supply shortages, and buyers of “things” everywhere. The lesson is simple – Wall Street is constantly looking forward, often 6-8 months or more. 


Thus, when the Federal Reserve started curbing inflation and fixing unemployment by raising interest rates in early January, markets calculated, opened their history books, and recognized what the Fed’s efforts would likely accomplish, and began adjusting prices accordingly. Of course, the results of our collective behaviors and interest rate hikes are just beginning to show the signs that Wall Street predicted 5 months ago.


Wall Street now sees that Main Street’s fear of a recession (and not the recession itself) may likely become so great that consumers decrease their spending. In addition, the impact of higher interest rates has slowed and may soon stall our real estate market. 


Despite good employment and still historically strong household finances, consumers on Main Street are expected to tighten their wallets and slow growth. If Main Street consumers close their wallets tight enough, businesses will be forced to lower their prices in order to entice consumers to spend and so, the predictable human behavioral cycle adjusts – nothing new, completely normal.


All this predictive behavior and historical examination will likely lead us to a period when Main Street fully feels the pain of the Federal Reserve's interest rate hikes – help wanted signs will start disappearing, prices will begin to fall and moderate, there will be plenty of goods on shelves, car lots will be full again, and financial news will begin focusing on deflation or another potential worry to excite wandering eyes. 


Of course, when prices fall, inflation rates will start ticking downward again. This will provide validation on Wall Street that the Federal Reserve’s efforts are working and – at some point – a shift will occur, and forward-looking Wall Street indexes will start advancing again even while consumers keep their wallets tight, and as Main Street is seemingly floundering.


We remain optimistic that the Federal Reserve will pull off another “soft landing” for the economy, however, energy costs and geopolitical instability may continue to create uncertainty and extend our recovery. As always, we will be keeping our eyes wide open and will make any necessary investment adjustments along the way.


At Charter Oak it is our pleasure and privilege to serve you. Get out and enjoy the summer!