Doherty Market Commentary Q3 2023

“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”
- Mark Twain

The annual autumnal chill is upon us and so, unfortunately, is the return of stock market volatility. For some reason, this time of year is often accompanied by market turmoil – most notably the famous market crashes of 1929 and 1987, but also countless smaller shocks that are no less unpleasant to live through.

The reality, however, is that stock market volatility merely shines a light on the risks that are ever-present with us. This fall, it seems that market participants are belatedly waking up to the dramatic rise in interest rates that began over a year ago. It was no less a risk in June as it is today – the only difference is that a few months ago, most investors chose to ignore it. In some strange way, for the long-term investor, a turbulent stock market can be seen as less risky than a rising one, only because we know that investors are paying attention to (and trying to price in) the risks.

There is certainly a lot to worry about these days. An interminable war in Eastern Europe. A debt crisis in China. A United Auto Workers strike. Stubborn inflation. Seemingly endless worries over potential US government shutdowns. And this is only a partial list.

But really, has there ever been a time in history when investors didn’t have anything to worry about? What we wouldn’t give to live in such a utopia, were it not for the fact that most likely, stock prices would be dangerously expensive in such a scenario, and just more vulnerable to the next great panic.

Volatility and uncertainty are the price we pay for the excess returns offered by the stock market. And those returns are only reliably available to those who maintain their equity allocation throughout all market environments. Yes, bonds and cash are currently offering nominal interest rates far higher than they have in the past, but this is reflecting an inflationary environment which we know erodes the purchasing power of bond portfolios over time – particularly for taxable investors.

How to best address stock market volatility?

Most important is diversification. A portfolio with a variety of risk exposures should protect capital over time, as some stocks “zig” while others “zag.”

Next is employing a conservative, value-oriented approach. Owning companies with tangible, valuable assets, reliable cash flows, and solid balance sheets provides a form of protection against permanent capital loss. Even though stock prices may be volatile (driven by the emotions of traders), there is more certainty in the long-term value of the underlying businesses.

Finally – stick with your plan. History tells us that today’s worries will recede, only to be replaced with new ones tomorrow. No matter what the future brings, long-term stock market returns accrue to patient holders of high-quality businesses.