Trimming expectations in the short-term
The chart below illustrates the 18% gain for the stock market so far this year. At this rate the market will be up over 30% in 2021—an outcome we find unlikely.
While earnings gains have been spectacular in 2021, this is the time of year when the market begins to look forward to how companies will be doing in the following year. We think 2022 will be a good year, but will offer nothing like the massive recovery in earnings we have seen since the market bottom in March of 2020.
So clients should be prepared for some type of correction in the weeks and months ahead.
Making short-term predictions like this is a fairly useless activity, but a normal 10% to 15% correction means a loss of $100,000 to $150,000 for every $1 million dollars invested in stocks. Nothing to sneeze at, so a heads-up is called for even though the losses are likely to be temporary.
Why is the August-October period historically nasty? Some of it might have to do with the estimated tax calendar. The tax on gains taken before September 1 are due on September 15th, while those taken after that aren’t due until January 15th. That four month difference might encourage holding on to stocks with gains through the summer then taking gains in September.
We are looking carefully at client allocations to stocks and making sure they are about the same as they were at the beginning of 2021. That could mean selling stocks in some accounts.
Losing money in stocks periodically during a bull market is normal and is the price we pay for standing by while great businesses work hard to make us wealthier. We think this a reasonable trade-off.
Daniel A. Ogden