Anthony M. Conte//May 27, 2022
Anthony M. Conte//May 27, 2022
If we have learned anything from over 100 years of combined experience serving individuals, families and business owners, it is that none of us should be in the habit of attempting to predict what the stock and bond markets do next.
Average investors’ wild predictions seem just as accurate as predictions made by the most erudite economists or asset managers…which is to say that none of us has a great track record at predicting the future.
I find it best to plan and manage assets for our firm’s clients by relying on basic facts and known quantities.
Rather than tell you what I think might happen next in the economy or the markets, and inevitably provide poor advice in the process, I think it’s much more helpful to assess the facts surrounding various market environments to better understand the context of our market environment.
The facts as we know them
Stocks are cheaper today than they were in January.
Ask yourself if, with a more than five-year time horizon to using money from your investments, it matters that the stock market might continue its slide for a few months before it bounces back. Regardless of what happens next, we know that you would get a better price on an investment purchase today than you might have gotten in January.
Many investors make the mistake of waiting for what they believe to be the ‘right time’ to buy into the markets that they miss some of the best days to invest in a market downturn.
It is easy to see how relying on predictions can encourage us to overlook the opportunities that often lay immediately in front of us. It’s a question of allowing logic to win out over emotion, isn’t it?
Staring down the bear
A bull attacks its prey with an upward arc of its horns, whereas a bear attacks by striking down with its front claws. This is the genesis of “bull” and “bear” market descriptors for strong and weak markets, respectively, and while being attacked by either animal would prove fearsome, it is the “bear” market that investors have come to fear (and sometimes even relish) the most.
A correction is a 10% to 19.99% drop in a market from a recent peak, whereas a bear market is a 20% drop or more. Corrections have happened, historically, every 1.5 years and bear markets have occurred with less frequency, roughly every 3.6 years.
Since 1928 there have been 26 bear and 27 bull markets, average losses in stocks during a bear market have been around 36%, and the average length of a bear market has been 9.6 months (or 289 days).
Why not just sell now?
By far the most frequent question I answer during volatile markets like this is “why don’t we just sell our holdings now and wait for the markets to come back?”
Reasonably, when investors want to sell their stocks it is because they have lost value and are losing faith in the opportunity for growth in the markets. At that point, markets have already suffered substantial losses, and any sale when it has become evident to most investors that a sale could help them stave off loss does nothing more than lock in losses and eliminate the opportunity for continued growth.
No one can consistently and effectively call a “bottom” to the markets, and when you consider that half of the S&P 500’s strongest days in the market occurred during bear markets, selling off when markets have lost value seems like a recipe for underperformance.
It is also worth acknowledging that by the time we realize we are out of a bear market and safely in bull territory, we will have missed, historically, 34% of the market’s strongest days of performance.
Recessions and bears
While various stock market indices have already reached bear market territory, some are still just flirting with the 20% drop, but nearly every investor I talk to seems to think that a recession is on the horizon.
Not every bear market is followed by or happens in concert with a recession, and a recession is nothing more than two consecutive quarters of negative GDP growth.
There have been 26 bear markets since 1929 but only 15 recessions during that same time period. That said, if a recession is to occur, it is common for the recession to follow the slide in the stock market, not the other way around.
And now for your business…
Given the mad rush toward the close of Q4 2021 to finalize the M&A work that so many business owners were engaged in, it is difficult to imagine another strong year in 2022 in the M&A space.
If you own a business and are considering its sale, this year may prove to be as good a year as 2021 to take some chips off of the table in a liquidity event. Consider the following facts:
Even though signs are emerging that growth of the economy is slowing, the most recent prior quarters and years may have seen your business with an upward trajectory of EBITDA and other metrics that could optimize the sale price of the business for the close of a sale this year.
The Federal Reserve’s aggressive approach to managing inflation by pushing rates up another five times this year and possibly three more times early next year is fully expected to have the intended impact of cooling off a well-overheated economy. This could equate to lower metrics over the coming quarters and years for your business which would ultimately limit an eventual sale price.
Sale prior to a downturn in the economy, while monetary policy is not yet prohibitive to buyers, could still offer many business owners a way out of their businesses with considerably higher valuations today than they might see in the coming years.
What next then?
Now to address my comment earlier regarding investors who might even “relish” a bear market, consider yourself the business owner to achieves maximum value for the sale of his or her business while the economy, ostensibly, stands on the cusp of a contractionary phase of the economic cycle.
You’ve sold your business in what is still, arguably, a hot market for acquisitions, and you’ve done so with your best quarters immediately behind you and possibly less advantageous quarters ahead. Now you have an outsized amount of cash to throw at the stock and bond market, both of which have been considerably devalued since the beginning of the year.
Sounds like a winning proposition, right?
This is just one reason why so many business owners rely on Certified Financial Planners (CFP), Certified Exit Planning Advisors (CEPATM), and the attorneys and tax professionals in your life to help them along on their financial journey.
Anthony M. Conte is managing partner at Conte Wealth Advisors based in Camp Hill. He can be reached at [email protected].
Registered Representative Securities offered through Cambridge Investment Research Inc., a broker/dealer, member FINRA/SIPC. Investment Advisor Representative Cambridge Investment Research Advisors Inc., a Registered Investment Advisor. Cambridge and Conte Wealth Advisors LLC are not affiliated.