The first three weeks of 2022 have seen sharp declines in the major U.S. stock indexes. The first 17 trading days are the worst start to a year in history. The NASDAQ, S&P and Dow are down 17%, 10% & 8% from their respective highs. The most aggressive sectors of the market have been hit the hardest, with ~40% of the companies in the NASDAQ down 50% or more from their peak. Bonds prices have declined as well. Why now?
The economy is still expanding, but input costs such as labor and energy have also been rising. The country is close to full employment and crude oil has risen from $53 per barrel to $87 over the last year. Inflation has become a concern as companies have trouble hiring and maintaining a sufficient work force, and there is much talk about potential price increases. The FOMC has noticed, and the FED is preparing to act by announcing their intention to increase rates 4-5 times, with the possibility of the first increase being a half point (50 basis points), rather than the usual quarter point (25 basis points). So, can it be a surprise that stocks and bonds are going through a weak period, given that interest rates may continue to rise?
Our belief is that the recent market action should not be a surprise. Expectations alone often change the direction of financial markets. Stocks began to decline well ahead of the release of earnings for the fourth quarter of 2021. Interest rates have increased, and the FED has yet to act. U.S. Treasury two-year bonds have risen from .12% to 1.0%, five-year bonds from .45% to 1.65% and ten-year bonds from 1.1% to 1.85%. Usually, by the time all the news becomes known, financial markets are well on their way to adapting to anticipated changes.
This discounting of future outcomes is one reason we believe it is important to avoid market timing with any significant part of your investments. As investment advisors focusing on the long-term is one of our most fundamental principles. The future is coming but we cannot predict what it will bring. It may be the markets are weak for a year or two or it could change in a month. What will not change is our long-term commitment to investing decade by decade.
Today’s lower stock and bond valuations can be perceived as a negative, but that is not necessarily the case for the long-term investor. Thankfully, in most cases, there are meaningful reserves available for shifting into more potential capital appreciation opportunities and rising dividend and income streams.
We hope everyone is safe and healthy and thank you for allowing us to be your private wealth management team.