During the first six months of 2022, we witnessed: (1) rapidly rising inflation (due to both continued consumer demand for goods and supply chain issues), (2) war in Ukraine, (3) a commodity price-shock, (4) the Federal Reserve finally raising interest rates, (5) continued Covid-19 surges and reactions such as China’s shutdown of Shanghai and (6) a decline in U.S. GDP growth. This is all on top of our collective Covid-19 experience.
Financial markets took notice and, since mid-January, have reacted with sharp declines in equities and fixed income.
In fact, through May, it was the 3rd worst start to a year since 1926 for a 60% equities and 40% bonds portfolio.1 It looked like we might see a relief rally in May; however, the declines extended into June with major market equity and bond indices either in correction or bear markets.
Across the board, asset classes have re-priced relative to both inflation and projected future cash flows, causing prices for longer duration assets such as growth stocks and longer-term bonds to lead the decline. The sell-off in longer duration assets and increasing concern over inflation has pulled the broader market down with it.
While the market re-pricing has been broad, the global expansion appears to continue, albeit at a slower pace. Most global economies are in mid to late cycle growth, while China’s economy may be bottoming.2
Commodity prices and inflation are expected to slow the current expansion, but not derail it. Rather, based on futures markets pricing, commodities and inflation may be cresting in the near term. The big question is whether inflation will persist at these levels and stall the global economy or if it will moderate without causing a recession.
The decline in the financial markets reflects collective uncertainty about: asset values, continued economic growth in the current inflationary regime and the impact of the Federal Reserve’s interest rate policy. Will the Federal Reserve succeed in navigating a ‘soft landing’? How much more will the market decline? Will we have a recession?
We do not have the crystal ball to answer these questions. No one does. We do know that this can feel exhausting—especially following a Global Pandemic. Exhaustion can lead to some investing mistakes like capturing losses by selling when a portfolio is down, rather than allowing a well-diversified portfolio to rebalance and work out of market declines.
We also know that, since 1980, the S&P 500 has averaged intra-year drops of 14% per year while still being positive in 32 of the 42 years and averaging an annual return of 9.4%.3 This 42 year time-period includes the 1987 Crash, 99-00 Tech Bubble, 2007-2009 Global Financial Crisis and the Covid-19 Pandemic. Hence, the old saw, ‘time in the market is more important than timing the market.’
While this has been a volatile start to 2022 and there remain legitimate concerns about the status of the economy, from our perspective the current conditions highlight the importance of the lynchpin of investment and financial advisory services: maintain a diversified portfolio, have a good plan, and stick to it.
A good plan includes understanding your needs and goals (1 year, 3 year and longer), having a cash flow plan for those needs which does not disrupt your investment strategies, and maintaining an asset allocation sufficient to meet your needs with the ability to adjust as conditions require. A good plan is your touchstone and the appropriate frame of reference for making decisions in volatile markets.
We do not know when the current market volatility will end or whether we will have a recession. We do expect continued market volatility until there is more clarity relative to the Federal Reserve’s inflation policy and the rate of change of inflation.
In the meantime, we are confident that now is the time to rely on your advisory team to help you stay on course, stick to your plan, and make any prudent adjustments as needed. As always, you are our #1 priority, and we appreciate your continued trust in us.
1. Source: BlackRock Student of the Market, June 2022.
2. Source: Fidelity Quarterly Market Updated, Second Quarter 2022.
3. Source: JP Morgan Guide to the Markets, May 17, 2022.