Market Update

Benjamin Haas |

I appreciate that I haven’t felt the urge to send an email like this in almost two years. When it comes to our investment process, no news is always good news with us! Especially when being a long-term investor (as you are) committed to the time-tested strategy of diversification (as you are), and not beholden to the main stream media who would lead you to believe every down day in the market is the start of a recession (OK, that’s an exaggeration…).

While we are essentially considered passive investors, we certainly follow the ebbs and flows of the market on a regular basis. We’re very much in tune with the human side of investing; volatility often leads to emotion and statistically you’re 2.5x more worried about investment loss than investment gain1. So, when we see market volatility, we want to fill you in on what we see and what it means for you, knowing that worry might be creeping into your mind.

Markets have been pretty volatile to start the year and have declined in 12 of the previous 16 sessions of 2022.  While we expect more volatility through this mid-term-election and Fed-rate-rising year, it’s always important to share the context for how we view things. Consider this the lens we hope you will view the market through:

  • Historically, 5% corrections happen 3x each year and last 40 days. This is normal.2
  • Historically, 10% corrections happen every 1.5 years. Pre-pandemic, we last had one in Q4 of 2018. This is normal.2  
  • In 2021, the market peaked early on 1/13 and then was actually lower than that point almost two months later on March 4 and still ended the year up 27%. The market was down the first quarter of 2020 and likewise in 2018. Slow starts are something we should be getting used to….2
  • Maybe the market was just simply inflated in the short-term? 27% in 2021 followed 16% in 2020 and 29% in 2019. 2018 was negative, but 2017 and 2016 were positive too.2
  • While there is usually not just one factor that drives the market south, the Federal Reserve policy shifts were certainly a part of the downturn that we saw in Q4 of 2018. We mention that because we think a shift in Fed policy certainly plays a role in the recent volatility.
  • Remember, that Q4 2018 downturn lasted less than 90 days and led to a banner year in 2019. A shift in policy needs to be digested and absorbed by the market before resetting course.

We share all of this to help add perspective to a few weeks of negative news. Also, we share because we feel there is some good news to take from the market volatility as we look to where we go from here.  

First, we think LPL’s Chief Investment Officer, Burt White said it really well on Monday, January 24th. “The reason for the recent bout of volatility is largely not pandemic related.  This is huge news as for the last 2 years, COVID has been the only dog that has wagged the market volatility’s tail. The recent concerns are around inflation, supply chains not meeting increased demand, and a hawkish Fed – all of which are by-products of a solid economy and recovery.  While volatility isn't fun, the reasons for its emergence matter and the recent volatility culprits are pretty positive.”

Second, you’re probably thinking to yourself, “Is this downturn a sign of a something more fundamentally broken in our economy or markets?” Answer: We don’t think so. We think that viewpoint is supported by the fact that markets seem to be rallying off its lows. On Monday, buyers entered as markets were, and still are, deeply oversold. That doesn’t mean that the market won’t go lower, but we think we are closer to the discovery making process of the bottom. Also a plus, broad markets have avoided correction territory (defined as a 10% decline from its peak) so far. Buy low, sell high, right?

Third, keep perspective. The last “low” we hit was in October 2021 (around 4300 for the S&P). While the volatility here in January feels dramatic, in terms of return, we’ve only gone backwards 3 months, following a year in which the market climbed 27%. We’re still doing ok.

Stay focused on your plan out there. Market volatility will likely remain elevated, but the best plans remain to stay focused, stay patient, and stay calm.

 

Tracking # T003566

  1. www.riskalyze.com [https://vimeo.com/188361232]
  2. Source: Bloomberg, 4/29/1942 - 12/31/2021. Past performance is no guarantee of future results. For illustrative purposes only and not indicative of any actual investment. Investors cannot invest directly in an index.