It’s been an interesting time in our business. First, the establishment of our new firm which also came at an interesting time in the Market. All I’ll say about the new business is a big Thank You to every client who made the journey with us and continues to trust us as their financial advisors – we don’t take your decision lightly and are thrilled to get to continue working on your behalf.
In terms of the market….where to begin?...As I write this piece, the S&P500 is down 14.86% this year. This is the worst start to a year since 1970. I’m sure most investors have heard the term “Bear Market” but just so you know the definition of a true “Bear Market” is a 20% drop in stock prices from highs. As you can see from the below chart the S&P 500 has flirted with that line so far this year but it hasn’t crossed. This is semantics but I thought I’d pass it on in case you didn’t know. The NASDAQ which is often used as a proxy for technology stocks since it contains such companies as Apple, Amazon, Microsoft, etc. is down substantially more and certainly contributes to how investors feel about the market since many stocks in the NASDAQ are the most widely held.
ThomsonOne chart – 3:39pm 5/26/22
There’s a multitude of reasons why which I won’t go into exhaustively but I’ll rank what I think the top three are in order of how I see the level of their impact to stock market prices:
1. Inflation/Interest Rates - I feel like I’ve been writing about this for over a year as it seemed inevitable. Every monetary policy decision made by the Federal Reserve is not made in a vacuum and they all have consequences. Zero and near zero interest rates were bound to cause inflation; especially when combined with the COVID financial relief packages administered by Congress. To be fair to the Fed, they knew they were going to have to raise interest rates at some point and they hoped it would be when the economy was on solid footing.
2. Economic shutdown and scarcity of goods - Similarly factories can’t be shuttered without causing economic damage and shortage of supply chains. Everyone has a story of how long it takes to get certain products right now. You can’t dam a river and expect the same output down stream. You can’t cause shortages and not expect price increases.
We all learned about the relationship of scarcity and prices in our high school economics classes
3. The Ukraine/Russia War - This causes economic impact which pales in comparison to the human impact. But we live in a globalized economy; whether everyone likes it or not, and wars cause scarcity. I’d argue our nation’s direct economic impact from this war is probably not as drastic as the news might make it seem but it is a factor.
Okay, let’s queue the what do we do about it part:
- Make sure we own good investments with good intrinsic value. Let’s know the investments we own and actually like them.
- These issues will pass. Scarcity will get better as factories catch up to the COVID backlog and companies work their magic finding solutions to supply chain issues. I trust that good companies will find a way to navigate challenging environments. I think the economy is on pretty solid footing. Unemployment is very low, wages have risen and continue to do so, and companies are profitable (77% of S&P 500 beat earning estimates so far this quarter).
- Keep market volatility in perspective. It’s normal.
I find understanding stock market history to be helpful. For instance, see the below chart that shows how the market has performed after the other “worst starts to a year” since 1932.
Until next time.
Important Disclosures:
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Stock investing includes risks, including fluctuating prices and loss of principal.
