Dear Clients and Friends,
As volatility in the markets pick up we wanted to send out some information to help bring these events into context and hopefully allay to some degree the unnerving nature of these movements.
There has been much discussion about the Nasdaq, which is an index of technology companies, and how it has sold off in the last few weeks. While technology companies have led the market in many ways for many years, they unfortunately do have the propensity for larger drawdowns periodically.
Here are the annual returns of the Nasdaq 100 going back to 1986:
So while the returns here are remarkable, the early 2000s, 2008, and more recently in 2022, the index did see large drawdowns. And while these events may lead us to feel like we have to sell or move out of this area, the annual growth rate of 13.42% is only achieved by taking part in the recovery in the following years.
At Bauer Heitzmann, we do not own the Nasdaq 100 directly in our stock portfolio but instead use (XLK) which is the technology sector of the S&P 500. This means the technology companies held in the fund are large enough to be included in the S&P 500 and weighted based upon their relative size. We use this purposely to have a bias towards large cap technology since small technology companies contain more risk, are generally more leveraged, and have a higher fail rate.
The 10 year Compound Annual Growth Rate for XLK is an astounding 19.48%. So while we expect more volatility from this holding (currently down -8.55%), we think it warrants holding for the long term as a strong growth catalyst.
The other area we wanted to bring context to is the history of Intra-Year Declines in the S&P 500. The chart below depicts intra-year negative price movements (in orange), but simultaneously shows the annual return ending the same year (in blue):
So it is very normal for intra-year declines, but more often than not, the market does recover in the same year and end positive. In fact the average length of time where a -10% drop occurs is every 128 days or 16 months (see chart below):
It’s worth mentioning that our equity portfolios contain much more diversification (international, sector, style, etc…) than these two indices alone so the drawdown percentages should be muted in comparison. And the overall asset allocation (mix between stocks, fixed income, and alternatives) plays a pivotal role in timing of the use of funds. As long as sequence of returns risk is properly managed, the equity portion of the portfolio will remain the growth engine of the portfolio to ensure our investments grow faster than the rate of inflation.
“To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest rewards.”
Sir John Templeton
We strive to be a beacon of clarity to each of you and hope this information helps as we navigate these choppy waters.