Since the Covid-inspired sell-off in the first quarter of 2020, major stock markets have generally been on an upward trend, even hitting new highs several times along the way. The U.S. stock indices finished 2021 near all-time highs. However, the first quarter of 2022 brings negative returns for practically all of the major market indices. Selling pressure came from several different angles, including the start of a rising interest rate cycle, high inflation, and Russia’s invasion of Ukraine.
While this seems like a lot of negative story lines, there are also positives to take away. For example, after negative months in January and February – and the NASDAQ entering correction territory – the markets fought back in March. The DJIA, S&P 500, and NASDAQ gained 2.6%, 3.6%, and 3.4% respectively. As is typical with major events, the market overreacts then recovers. Some of the best days of the year happen on the heels of some of the worst days. The gains since mid-March could indicate that the current down market has bottomed, but there is no guarantee of this.
I would like to break my thoughts down into three categories: what we know, what we don’t know, and what we should remember.
What we know:
– We know that inflation is at a 40-year high. In February, inflation accelerated to 7.9%, the highest since the 1980s. Food and energy were the biggest contributors to this, with most other categories not far behind. Though this does put near-term pressure on equities, historically equities have been a reliable way to combat inflation.
– We know the Federal Reserve is expected to raise rates seven times this year. The first came in March with a 0.25% increase. Upon announcing this increase, the Fed indicated the likely path of increases at each of the six remaining meetings this year. The number and percentage of these increases is a delicate balancing act of trying to curb inflation while not hurting the economy.
– We know most economic numbers and corporate fundamentals are still good. Jobless claims are low, bouncing around at or below the pre-pandemic average. In March, 431,000 new jobs were added, despite fears of an economic slowdown. According to the U.S. Labor Department, the U.S. has regained 93% of the jobs lost during the beginning of the pandemic. Job openings are at record levels. Wages are increasing but not to the level of inflation. Remember, inflation and rising interest rates are typically signs of a growing economy.
What we don’t know:
– We don’t know with certainty the increment at which the Federal Reserve will increase rates. The Fed is not bound by 0.25% moves. If they decide a larger increase is needed, or that more increases than originally indicated are necessary, this may scare the markets.
– We don’t know what will happen in the war between Russia and Ukraine. While we can estimate other factors (rising rates, inflation, etc.), this is one area where we truly have to wait and see. Investors don’t like the unknown, which lends itself to volatility and rash decisions. Obviously a peaceful resolution would likely be well received by the markets, but there are simply too many possibilities to know how this will end.
What we need to remember:
– Market declines and corrections are common. Analysts at Charles Schwab recently studied intra-year returns over the last 20 years. What they found was a decline of at least 10% happened in 10 out of the 20 years, or 50% of the time. Remember, that was at least 10%. The average decline was 15%. Despite this, stocks rose most years, with only three out of the 20 years posting negative returns on the year. This is why it’s important to stick to your plan and stay the course.
– Corrections and market declines create opportunities. Outside of entering a recession, corrections have proven to be good buying opportunities. Generally, high quality companies with good fundamentals continue to be so. Therefore, look at rebalancing opportunities and adding quality investments on sale.
Though off the all-time highs of last year, the S&P 500 is still up 102% since the low in March 2020. It’s up 34% since the pre-Covid high in February 2020. So, while this was the worst quarter in two years, it’s more a reflection of how good the market has been, not necessarily how bad it is now.
No one knows what the rest of the year may hold, but we do expect continued volatility. Diversification, rebalancing, and other strategies are important now like always. Having a good financial plan in place means you don’t have to worry about what the market does tomorrow. Maintaining a long-term approach provides this freedom. This is the peace of mind we want you to have.
Call us with your questions and concerns. We wish you and your families a blessed spring. We hope to see you soon.