Some Thoughts on a Difficult 2022
Written by: Blake Millard, CFA® - Director of Investments
A Difficult start to 2022
War. Inflation. The Federal Reserve hiking interest rates. Inverted yield curves. COVID sub-variants. Supply chain bottlenecks. A negative GDP print. Talk of a possible Recession. Historically depressed sentiment indicators. Etc... The start to the year has been one to forget for almost all asset classes, and yet, things went from bad to worse in the markets last month.
2022 (YTD thru 05-09-2022)
S&P 500 -16.26% *worst start to year since 1939*
Nasdaq -25.71% *suffered worst month since October 2008*
It’s even worse when looking past the index level returns and under the hood, where many individual names are down significantly more. Here are a few names you may recognize.
And with the Federal Reserve reversing its dovish stance and embarking upon a new rate hiking cycle, fixed income has come under pressure across all segments. The Bloomberg US Aggregate Bond Index, a universally accepted bond proxy for investment grade debt, is also suffering its worst year on record returning -10.11% year-to-date. With stocks down and bonds down, the 60-40 portfolio is under pressure.
Perspective on this Market Correction - May 6, 2022 (Read here)
Every stock market correction is different. There are different reasons, economic environments, valuations, interest rate curves, market leadership, magnitude of decline, and duration.
This market correction arguably began over a year ago in early 2021 when the more speculative and high multiple corners of the market started to roll over following the unprecedented fiscal and monetary stimulus measures brought by central banks around the world. The ARK Innovation Fund (ARKK), the IPO and SPAC markets, and Chinese Tech stocks all peaked in mid-February 2021, with these names down 50-70% from their all time highs. Buyers stopped bidding up prices as valuations overshot to the upside, and the sellers haven’t stopped since.
Then the weakness spread in earnest to other segments after Jerome Powell, Chairman of the Federal Reserve, announced in a late November 2021 speech that the United States Central Bank would pivot in their policy guidance and phase out its bond-buying program to fight off higher levels of inflation (rising producer and consumer prices), effectively removing the punch bowl and signaling to the market that the COVID-induced monetary easing policies were coming to an end. This moment would mark a period in which interest rates would no longer remain anchored near zero. In fact, interest rates have risen materially in just the last six to seven months, which acts as a headwind to future equity growth prospects.
Historically Bad Sentiment = Buying Opportunity?
Predicting the short-term movements in markets is always impossible, and that doesn’t change when asset values are going down. If anything, it’s probably even more difficult to predict what’s going to happen next during a correction because investors focus less on fundamentals and more on risk management and loss aversion. This loss of confidence can be reflected in the current investor sentiment data, an important coincident market indicator. This weekly survey from the American Association of Individual Investors (AAII) has been conducted since 1987 and we’ve seen only 5 weekly readings worse than the present print – today’s reading is on par with September-October 1990 and March 2009:
Outlook for 2022
Our base case heading into 2022 was a difficult and choppy 1st half as the market digested sticky inflation and rising interest rates. While the first half has proven to be more challenging than expected, we do anticipate a meaningful recovery sometime in the 2nd half of the year as the market regains its footing. After all, the consumer balance sheet remains in better shape than pre-pandemic levels, corporations are still growing earnings, credit default risk remains low, and maximum bearishness from a myriad of headline risk factors potentially allows for an upside surprise rally should we gain clarity on any of these risks. It’s also important to keep volatility in perspective, this year being no exception, given your investing journey will not be without some bumps along the road. Below is a JPMorgan chart showing the investment results for the S&P 500 index over time, with the average intra-year drawdown at 14% - roughly the same level pullback we are seeing today.
Risk Management and Your Investment Accounts
At Sandbox, we continue to manage risk with vigilance and remain more active than customary market conditions would dictate. Since early January, we have taken a multitude of actions across the landscape to lower portfolio risk, become more defensive and reposition assets – including adding structured products (income and growth notes), paring back high-growth names and international equities, reducing interest rate risk via duration management, moderating our preference for growth-over-value, and aligning closer to benchmarks via passive and index based ETFs (exchange-traded funds). As markets change, so do the allocations of your accounts.
Ultimately, for the individual investor, the most important consideration during a market correction is to focus on your investment plan, which is a mix of time horizon, cash flow and financial goals. Jason Zweig, a tenured and respected writer for the Wall Street Journal, once wrote:
Good advice rarely changes, while markets change constantly. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.
In other words, investment success accrues not so much to the brilliant as to the disciplined. Should you wish to discuss market events, outlook or your individual investment account(s), please let us know. We remain at your service.
For Additional Perspective & Sandbox Commentary
- Perspective on this Market Correction - May 6, 2022 (Read here)
- Perspective for Corrections, Bear Markets and a War - February 22, 2022 (Read here)
- When the stock market plunges, Remember to keep perspective - February 1, 2022 (Read here)
- Comments on the Market Correction - January 25, 2022 (Read here)
- The Investor's Cycle of Market Emotions - October 5, 2021 (Read here)