To investors,

Inflation has been the story of the decade so far. We went from sub-2% in early 2020 to over 9% by the summer of 2022. Today, one of economists favorite metrics sits at just under 3%.

This roller coater ride has had a significant impact on asset prices and investor psychology. On one hand, investors who have been allocated to the stock market continue to see their portfolio value increase as indexes push higher. The classic adage “time in the market is more important than timing the market” stands for a reason.

The S&P 500 is up 85% over the last 5 years. Russell 2000 has appreciated 42% and the Nasdaq 100 is up 141% during the same time period. Investors simply had to invest in indexes and chill. Monetary and fiscal policy did the rest for them — inflation took off, the dollar was devalued, and asset prices went up.

As stocks went higher, investors gained more confidence that higher prices were just around the corner. Add in the fact that existing capital in the market was also gaining value and you can see how we arrive at the new all-time high of stock allocation as a percent of financial assets.

Wall Street Journal's Gunjan Banerji writes yesterday:

“The surging stock market has minted millionaires and helped send many Americans’ net worth sharply higher. As of the second quarter, the number of 401(k) retirement accounts at Fidelity Investments worth at least $1 million reached around 497,000, according to the firm. That is up 31% from a year ago and a record high.

U.S. households’ stock allocations have steadily inched up this year, according to JPMorgan estimates, and recently accounted for around 42% of their total financial assets. That is the most on record in data going back to 1952.”

There is a debate raging due to this data — are investors merely riding the trend that will continue for the foreseeable future or are investors over-confident and a market correction is just around the corner?

The short answer is no one knows, but I think the framework for evaluating the situation is wrong. Only short-term oriented investors should be concerned about the week-to-week or month-to-month oscillations in the stock market.

Majority of investors should simply have a long-term orientation. They can be oblivious to price movements and merely continue dollar cost averaging into their preferred index. Given enough time, the stock market will continue going higher and is essentially guaranteed to be at new all-time highs.

The United States debt requires dollar devaluation, which in turn pushes all assets denominated in dollars to be worth more in dollar terms.

So the only people in the market who should be worried about short-term price movements are older folks who have less time to benefit from. Anyone under the age of 50 years old has at least a decade, and probably longer, to weather potential market downturns.

The beauty of ignoring short-term predictions is that an investor is exposed to the market if prices go up and they are continuing to dollar cost average if the market goes down. If the market is up, your portfolio is worth more. If the market is down, you are buying more assets at cheaper valuations.

Regardless of the scenario, being long the US stock market over decades is a cheat code — the US stock market is the greatest millionaire minting machine ever created.

You just have to be able to allocate capital, stomach volatility, and stay focused on the long-term. And based on the latest data, it looks like more Americans are deciding to go long stocks. We’ll see what they do if there is turbulence in the coming months.

Hope you all have a great day. I’ll talk to everyone tomorrow.

-Anthony Pompliano

Founder & CEO, Professional Capital Management

Reader Note: BUILD Summit, our annual conference in NYC for founders, is coming up next month on September 26th.

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Darius Dale is the founder & CEO of 42Macro.

In this conversation, we discuss inflation, productivity, asset prices, political impact, federal reserve interest rate decisions, and outlook for 2024. 

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Darius Dale Explains Why Inflation May Come Back In Q1

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