Market Analysis

Keep calm and carry on

Sep 21, 2022

On September 8, Queen Elizabeth II, the longest reigning British monarch, passed away. She served her country and commonwealth countries as head of state for 70 years through numerous wars, economic crises, political crises and global events. Her signature leadership style was one of dignified calm and resilience that provided the often-tumultuous world with a voice of reason through countless challenging times.

Reflecting upon the events of this year and even of those of the past few weeks in the economy and the market, we could all do with taking a page from her book.

What has been happening in the market? 

The market experienced heightened volatility in the month of August. Some market participants expected the Federal Reserve to pivot to a softer stance on further rate hikes at the Jackson Hole Economic Symposium and were disappointed when instead the Fed’s message was one of continued rate increases, even at the expense of economic pain, until inflation is under control.

This resulted in a pull back from the July market rally. Markets have been more volatile since then, as uncertainty around the outlook for inflation, interest rates, potential recession and corporate earnings continue to weigh on investors’ minds.

We often talk about the challenge of trying to time the market based on economic and geopolitical events, but we recognize that no matter how disciplined an investor you are, there is always the potential for a sliver of doubt to emerge around the dangerous notion of “this time is different.” It’s easy to be tempted to tinker with your portfolio when the outlook is uncertain.

So let us remind you that no one (not even economists) have an accurate crystal ball to predict where the economy is going next. A recent memo, The Illusion of Knowledge (a dense but informative read), by Howard Marks underscores the futility of macro-economic forecasting and using these forecasts to inform investment decisions.1

Marks highlights one of the key challenges with economic forecasts: that they are based on models, and these models make simplifying assumptions that cannot begin to simulate the unpredictable actions of the millions of consumers and the decision points that ultimately influence the direction of the economy.

“The bottom line is that the output from a model may point in the right direction much of the time, when the assumptions aren’t violated.  But it can’t always be accurate, especially at critical moments such as inflection points . . . and that’s when accurate predictions would be most valuable.”2

Even when economists get predictions right, the implications for the stock market can still be uncertain because the market is often a leading indicator of the economy. Marks points out that “some economic forecasters correctly concluded that the actions of the Fed and Treasury announced in March 2020 would rescue the U.S. economy and trigger an economic recovery.  But I’m not aware of anyone who predicted the torrid bull market that lifted off well before the recovery got underway.”3

Reframing your perspective

If you can’t trust predictions about the economy, then how do you manage through the current period of uncertainty in the market?

First, take all predictions you see across the media — whether they are positive or negative — with a grain of salt, and don’t let your emotions sway you into making any drastic changes to your portfolio.

Second, accept that there may be some years when market returns are negative, but over the long run, markets go up more than they go down. In fact, as the chart below shows, since 1926 the U.S. stock market had a negative return in about 25% of calendar years (that is one out of every four calendar years), but over the full period, the market returned a little over 10% on an annualized basis.

Additionally, after a negative year, market returns tend to be positive over two thirds of the time. The most recent example is a 5.0% loss in 2018 followed by a 30.4% gain in 2019.

U.S. stock market index returns by year, 1926–2021

U.S. stock market index returns by year, 1926–2021

Source: Dimensional Fund Advisors

Does that mean you should get out and just wait to get back into the market next year? No, because there are also no reliable forecasts for when things might start to look a bit better. For example, if inflation data eases unexpectedly, the market could bounce back significantly.

We still have a few months left in the year that could have the potential to surprise us (in a good way). As many news stories have reflected on the numerous historical events that occurred during Queen Elizabeth’s time as British monarch, it’s also important for investors to reflect on their long-term goals and to keep perspective on shorter-term market downturns, which are a normal (although never pleasant) part of a long-term investing experience.

Keep calm and carry on!

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Rafia Hasan, CFA, CFP®
Principal, Chief Investment Officer
View Profile

1 Marks, Howard, “The Illusion of Knowledge,” Oaktree Capital Management, L.P., September 8, 2022,, accessed September 20, 2022.
2 Ibid.
3 Ibid.

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