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The 2022 Sell-Off: Making Sense of the Markets

The 2022 Sell-Off: Making Sense of the Markets

The market weakness in 2022 has continued to accelerate, driving equity prices lower. While it may feel like a pretty extreme selloff, the S&P 500 selling off 15% is fairly normal, occurring every 2.5 years. Even if we reach a “bear market”, defined as a 20% or more decline, this will occur on average every 4 years, so we are experiencing a phenomenon that is relatively frequent.

This, of course, doesn’t make anyone feel particularly better. As our revenue is tied to our clients’ assets under management and every advisor in our firm invests in the stock market in some form, we all feel the pain. There are many reasons for this. Inflation has run significantly above target levels. The Fed is moving away from ultra-low interest rate policies. And the war in Ukraine continues. These have all contributed to the uncertainty surrounding companies and their future outlook.

We have continued to watch earnings as they have been reported. Presently, they still are strong but earnings surprises have trended lower and future earnings are looking a bit more tenuous pending all the above uncertainty. This is not to say that we haven’t already hit the bottom of this pullback, nor is it saying that things can’t get worse. It is worth mentioning that today’s stock prices reflect the expectations of future earnings by companies. It is predictive in nature, and that’s why we have seen the results in 2022 when we look in a rearview mirror. An end to the Ukraine war, easing of inflation numbers, reduced COVID cases & lockdowns, and better news on supply chains could all be factors that will likely drive equity markets higher. A dive into a bear market could be caused by a worsening of any of the above as well, and that is precisely why we tend to advise caution in making any short-term decisions that can have long-term impacts.

Did you also know that the bond market is having its worst year since 1842(!!!)? Normally we see an inverse relationship between stocks and bonds, with bonds increasing in value while we see a negative stock market.

So, What to Do?

Assessing timeframes is obviously extremely important. Keep in mind that despite the pretty awful market we’ve seen so far this year, the longer-term returns look strong. Here’s a chart of the S&P 500 over the last five years:

Just from eyeballing the chart, you can also see that we’ve had some pretty feracious pullbacks before we hit higher highs. The difference between now and then? Inflation is running hot, and recent reports are showing that it is not coming down quickly.

What Can We Expect in the Future?

According to research by First Trust, out of the last 185 quarters, only 16 had stocks and bonds falling together. When we look back at historical data, returns tend to be positive in the stock and bond markets, especially in the 1- and 3-year periods. See this chart that lays out prior stock and bond market returns. While we know that the future is uncertain, we also know that it’s almost never about timing the market, it’s about time in the market.

Clint Walkner

Market Correction: What It Is and Why Market Corrections Matter

Market Correction: What It Is and Why Market Corrections Matter

The domestic and international stock markets have started 2022 with a level of volatility unseen for the past few years. The rather benign market conditions, over the last 10 years, have lulled investors into a false sense of security and normalcy that is anything but normal. 

This is completely understandable when we look at the recent history of the S&P 500, a benchmark for US stocks. The S&P 500 has only posted one year of negative returns greater than 1% since 2009. The index’s loss of 6.24% in 2018 was paltry compared to its 38% loss in 2008 and three consecutive double-digit down years of 2000-2002. This is all to say that the beginning of 2022 is a reminder that volatility and market corrections are part of the normal market cycle, not a deviation from it. 

What is a Market Correction?

The term “market correction” is generally defined as a drop in a given market index of at least 10%, but not more than 20%. A drop of more than 20% is referred to as a bear market.

To give some perspective on the recent history of market corrections, the S&P 500 experienced a market correction in 11 of the past 20 years. Further, the S&P has experienced a correction, on average, every 19 months since 1928. This helps to illustrate the fact that market corrections are common over most periods of time and should be viewed as the market resetting stock valuations back to a more fundamental level.

Most economists believe that periodic corrections are healthy for investment markets, particularly stock markets, as equities tend to have large price swings. As stock prices appreciate over periods of time, there can start to become a disconnect between the valuation for a company and the price of its common stock. While the relationship of company valuations and respective stock prices can be a moving target, market corrections help to bring this relationship back in line, and, in some cases, corrections can provide a buying opportunity as the stock price may fall too far relative to the valuation. The circumstances and variables that cause the to market slide are different each time, which makes predicting when a correction will happen and for how long nearly impossible. Furthermore, many corrections have been caused by non-financial related events such as geopolitical issues or military skirmishes.

Investing During a Market Correction

Now that we have a better understanding of corrections and their history, we need to turn our attention to how we should react during a correction. Corrections can be a scary, unnerving period of time in a market cycle, however, history shows us that corrections last, on average, four months before the market makes up the loss. This is the reason why most economists recommend riding out market downturns. Often people ask the question, “why not just sell stock positions when the market begins to fall and buy back in when the market bottoms”. This is almost always a recipe for disaster as it requires correct market timing, not one, but two major moves in a portfolio. It also requires that we are actually at the start of a correction. We know that we are in a correction once the market has already fallen 10% and, by that point, it is too late to avoid the loss by selling shares. The best advice for weathering volatility in the markets is to fully understand your personal risk tolerance and accurately match your investment allocation to that risk profile. This way, we can have confidence that our portfolio is built to withstand the appropriate amount of market loss for your specific situation.

Nate Condon