The Goldilocks stock market made a new all-time high on the first day of trading in 2022, however it quickly turned into a tumultuous month from there. In the end, the S&P 500 Index lost 5.3% in January, for the worst first month of the year since 2009.
Thus far, we’ve experienced stocks down significantly, only to recover later in the day. Bear market fears of sticky inflation and tightening monetary policy are the main culprits for the market slump and volatility. There are a couple of other bear concerns nagging the market which I will address through charts below.
First off, we haven’t seen a 10% correction since March 2020, which is a very long stretch without a normal decline. Last year really spoiled (newer?) investors, as we only had a single 5% pullback all year. This isn’t normal and means investors should be prepared for more volatility much like we’ve experienced thus far in 2022.
Interest Rates & The Market
The stock market is resetting expectations with the realization that rate hikes are coming from the Federal Reserve Bank. Though the stock market may not take kindly to interest-rate hikes, higher rates are a sign that the economy remains in solid health and should continue to boost corporate earnings. The chart below shows that the market historically has done well after the initial rate hike largely powered by solid earnings growth.
Tensions at the Russia/Ukraine border crisis along with strained U.S.-China relations are also fueling market uncertainty. However, looking at other major geopolitical events throughout history shows that stocks usually don’t take them as major market events. Easter Europe and U.S.-China relations certainly bear watching but with a strong U.S. economy and healthy corporate earnings, the stock market is in a good position to withstand these potential geopolitical events over time.
Oftentimes, the stock market doesn’t like politically uncertainty very much. This could weigh on market returns somewhat heading into the 2022 midterm elections later this year. However, as shown in the chart below, pre-election jitters tend to burn off post-election with stronger market returns later in the year.
Fear Can Be The Best Fertilizer For Future Bull Markets
There will always be something to worry about and investing in stocks involves risk which is why longer-term returns are attractive. However, it really isn’t investments that get tested in volatile markets; it’s investors. Right now, many investors seem to be too focused on the short-term and neglecting a lot on the longer run.
Sitting tight during wide market swings is certainly difficult. However, with an appropriately diversified portfolio and understanding that markets bottom through a process, navigating through market tumult without constant second-guessing can be much less stressful.
Happy Lunar New Year
David Hone, CFA