Increased Market Volatility |
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Stock and bond markets have dropped during the first part of 2022. More specifically, the aggregate U.S. bond index is down more than 10% and the S&P 500 stock index is down about 15% this year. Rising interest rates from post-pandemic record lows have pushed bond prices lower (interest rates and bond prices move in opposite directions). This unusual combination of falling stock and bond prices, has left conservative portfolios exposed to more risk than in historical market declines. In the past, bonds have tended to hold up when stocks are weak and vice versa. While we have taken steps to reduce portfolio risk by making changes to stock and bond holdings, we are still subject to broad market impacts and the resulting frustration of these circumstances.
The stock market downturn has accelerated during May, as familiar headlines have taken their toll. Soaring inflation is being fought by a hawkish Federal Reserve Bank hiking interest rates and raising fears of a U.S. recession. Russia’s war in Ukraine is pushing energy prices higher, threatening global food supplies, and possibly leading to recession in Europe as well as collapse for the Russian economy. China’s zero Covid-19 policy and broad lockdowns is resulting in further reductions of global GDP growth and continued supply chain disruptions. Amid this backdrop of economic threats, the U.S. economy is slowing, but still growing.
Market volatility feels uncomfortable after the smooth rise in stocks, which started at the pandemic lows of March 2020. But putting corrections in perspective is important. We know that since 1950, the S&P 500 has had an average drawdown of 13.6% during the course of a calendar year. History also tells us that we can expect a market correction of 10% to occur every 18 to 24 months, and a bear market decline of 20%+ every 5 to 7 years on average. After the stock market soared by 100% on the heels of massive pandemic spending in three years ending December 31, 2021, we are not surprised to see some fallout as fiscal and monetary stimulus reverse course.
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We believe volatility is likely to remain elevated as the Fed works to slow the economy to fight inflation, and as markets digest the ebb and flow of contradictory signals of strength and weakness. Many counteracting market forces are already in play to reduce inflation, but take time to play out. Unfortunately, the political and populist environment does not provide leeway for the Fed to wait. Engineering a soft landing for the economy is unlikely given the extremes from which we started – all of which were at or near multi-decade records including: (high) inflation, (low) interest rates, (high) stock market valuations, and (low) unemployment. Of course, forecasting recessions is a fool’s game, but our bias is to be more cautious, rather than less.
We will continue to review market conditions and make portfolio adjustments when and if deemed advisable. In the meantime, we recommend focusing on the things we can control: spending plans, savings plans, tax management, and cash management. If you are an investor that is saving money, lower market prices provide an opportunity to buy stocks and bonds “on sale.” If you are an investor that is withdrawing money from your portfolio, we recommend ensuring your plan includes sufficient cash so that your portfolio can be maintained in all market conditions. We are here to help with specific planning questions and concerns, so please feel free to reach out your advisor for support.
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Marc Usem (Chief Investment Officer) and the Affiance Financial Investment Committee
(952) 544-9818
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This email contains discussion of Affiance’s positions and/or recommendations as of a specific date. Due to various factors, including changing market conditions, such discussion may no longer reflect current positions and/or recommendations. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that future performance will be profitable, or equal any historical performance level(s). Moreover, no client or prospective client should assume that any content in this email serves as the receipt of, or substitute for, personalized advice from Affiance or any other professional.
Advisory services offered through Affiance Financial, a Registered Investment Adviser. Securities and advisory services offered by Registered Representatives and Investment Advisor Representatives through Private Client Services. Member FINRA, SIPC. Affiance Financial and Private Client Services are unaffiliated entities
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