May 13th, 2022
Thoughts on the 2022 sell off so far
It’s been a rocky first 5 months for the US markets. We’ve seen much news about interest rates rising, conflict in Ukraine, supply chain issues, and other geopolitical events. All of this has affected individual companies and the markets as a whole. While we are seeing extreme levels of volatility, the emotional narratives we are hearing in the news are often more exciting than the facts. Solid gains are good, but highlighting downturns in the stock market seems to be a better business model for CNBC and other news outlets.
The numbers aren’t pretty: through the middle of May, the S&P 500® Index (“SPX”) was down approximately 17%, with the NASDAQ (“NDX”) down 26% year-to-date.
Financial markets have historically seen these significant pullbacks at some point during most years. These market corrections are defined as a 10% decline in one of the major U.S. stock indexes, typically the S&P 500.
Memory and emotion can sometimes get foggy, but these corrections are not new to us. As recently as 2015/2016 we witnessed a 14% correction, while the S&P 500 still saw positive returns in both those years. In 2018 we saw a 19% loss at the end of the year, but when we look at 2018 as a whole, despite the volatility, 2018’s approximate 4% loss was recovered in early 2019.
In March-April 2020, we saw a downturn that was much more than a correction. Facing the Covid-19 Global Pandemic, the S&P index was down approximately 35%. Yet once again the return for 2020 was positive. This bores out an old investing philosophy, “it’s not the timing of the market, but the amount of time you stay invested in the market.”
How does the broad market affect your portfolio and investment?
We have yet to hear of someone that can predict when exactly any market will hit its’ peak or bottom. But, looking broadly at the history and the cycle of the markets informs us about where markets may be heading in the next 3 months or 5-10 years. Given this information and history repeating itself, our focus during this time is to ensure your overall portfolio and the individual holdings meet your goals, and are performing at an appropriate risk adjusted level, while maintaining our eye on the future. Now is the best time to ensure the current conditions and your goals are still aligned.
We should be reviewing certain factors in particular:
Timeframe - When will we need to start taking money from the investment?
Objective - What is the purpose of the investment?
Risk - What is our expectation of risk vs reward?
We continue to allocate portfolios based on these goals and set return expectations based upon the S&P 500 and other indices. We cannot control the broad markets or the economy. But in times like this when these broad based goals can seem to be in direct competition to the current market conditions. We can control the portfolio, the individual investments and try and take advantage of the possible opportunities presented. Some of these small advantages during volatility allow us to review, rebalance portfolios and reinvest dividends. Rebalancing plus the addition of dividends, and the addition of cash, allows purchasing shares at a possible lower share price. Thus the old expression “buy low, sell high”. This can help create greater returns and limit losses in the long term and, if the market rebounds quickly, possibly short term.
Outlook- Next 5 Months
The word to focus on in the next 5 months is volatility. We expect stocks to stage a few 10% rallies from June to September. These rallies may be followed by declines that lead us feeling as if we are going nowhere quickly. It looks to be frustrating as investors adjust to a new Fed cycle, the post-COVID business cycle and persistent inflation. These are periods that come and go for seasoned investors. They are normal and natural and help to burn off excesses that have built up during extended rallies.
Outlook- End of year
While we expect the stock market to be volatile for the next few months, we expect an end of the year rally. With continued solid economic data, interest rate hikes being absorbed by investors, and midterm elections completed, we may see a 4th quarter rally which helps curb some of the yearly loses. If momentum gains on the positive story line, it is possible we could see the SPX forging to positive territory and make a new all-time high by the end of the year or early into next year.
The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly.