This Month’s Newsletter

The "Wall of Worry" Join our Monthly Newsletter October 2021

Carl W. Hafele, CFA, CPA

Co-CIO, Principal

Oh, climbing the proverbial “wall of worry” is a prerequisite for a long term bull market. We have officially been in one for over a decade. We have received double digit rates of return since 2019, so yet again, why worry?

Historic “Wall of Worry” Victories

Having been around this investing game for over three decades, I experienced – painstakingly so – numerous episodes of when the wall of worry finally overwhelms the almighty roaring Wall Street bull and in sports parlance, gets the “W.” A few to recall:

1987 – October 19th one day 20%+ decline. Clients called us and pleaded that we don’t jump out of the window a la 1929.
2000-2002 – Dot com bust of 50% from sky high valuation levels.
2007-2009 – Great Financial Recession driven by a plethora of policy errors by many (see my Great American Reset book from 2015). Yet another 50% plunge.
2020 – The Covid pandemic propelled a 30%+ decline in Q1 and Q2 before promptly skyrocketing back.

Yet each and every plummet eventually recovered and a new bull was born. In 1987, it took just a few months. Combining the periods that included the 2000-2002 and 2007-2009 bears, your rate of return from 2000-2010 was 0%. Repeat 0%.

So where are we now? We should address the elements of today’s “wall of worry,” projected rates of return vs. historic norms and summarize any conclusions.

Today’s “Wall of Worry”

Several “wall of worry” items include (but are not limited to):

Interest rates have never been lower.
Slowing economic growth ahead after the sugar high from fiscal and monetary Covid rescue programs.
Stock prices have never been higher.
Valuation levels by most all measures are in the top 10% of historic norms.
The government has never printed more money – and that’s an understatement!
Numerous political challenges and gridlock on the merits of capitalism.
- Includes proposed higher corporate tax rates of all the highest developed countries when state taxes are included.
- Proposed higher individual ordinary and capital gains tax rates at the levels where incentives are reduced?
With “transitory” inflation looking not-so-transitory, energy prices soaring and the Fed has announced its pending Q3 tapering, is now the reflection point?

Note the list above does not include black swan events such as a Chinese developer default contagion, a Covid resurgence, a global energy crisis, a revolving (independent?) Fed, etc.

There is always a “wall of worry!” So what should we do?

Historical and Projected Rates of Return

We are a huge believer in the time-tested theory of where you buy determines your long range rates of return for all asset classes. Valuation is a horrible short term predictor yet a fabulous long term one. We have contacts with many phenomenal sources regarding projected rates of return, and our summary is as follows:

Note in the chart, each and every asset class is projected to return less than their long term averages driven by two items:

Interest rates have room to rise and little room to fall
Equity valuation levels are very high, driven by the Fed’s accommodative monetary policy and TINA (There Is No Alternative).

Assess Your True Risk Tolerance

What does all this mean? We should all reassess our true risk tolerance as we are late in the cycle and (sad but true) we are yet another year older. We strongly advise a very diversified portfolio that includes real estate and hedge funds, and one may also consider our private investments in Senior Living opportunities.

Carl W. Hafele, CFA, CPA, is Co-Chief Investment Officer and Principal at Lanier Asset Management. He is also an instructor in Finance and Economics for the MBA program at Bellarmine University.