Q4 In Review

Q4 2021 Recap

Dear clients and friends,

If you casually browse the latest financial news headlines, you’ll notice a great deal of hand-wringing in the press over the possibility of a stock market correction in the new year. Indeed, a Google news search with the keywords “stock market correction 2022” returns over 127,000 stories written in the past month alone! [1]

Some of these news stories strive for accuracy in predicting the market’s next moves. Case in point is a Bloomberg piece that forecasts a rise in the S&P 500 index to the 5,000 point level in the first few months of the year, followed by a sharp sell-off in the second half.[2] Other articles do away with any pretense of precision in favor of an attention-grabbing headline, such as one from Barron’s suggesting both “a boom and a bust” in the new year, though perhaps not in that order.[3]

Such forecasts remind us of a Wall Street tale from the 1920s, in which a young investor approached a renowned US businessman and asked him to opine on the future direction of the stock market. As the legend has it, Mr. J. Pierpont Morgan responded confidently to his inquirer, “Young man, I can tell you exactly what the stock market will do. It will fluctuate!”[4] It did then, and it does still!

Every now and then, those day-to-day market fluctuations become more pronounced, and the extreme fluctuations we classify in special categories. A “correction” is generally considered to be a stock market decline of 10 to 20% from a prior peak, while a “bear market” is a downturn in which prices decline 20% or more. These contrast sharply with the friendly “bull market” in which stock prices are generally rising.

History shows that stock market corrections are more common than you might think. In fact, over the 42-year span from 1980 through 2021, the S&P 500 has experienced a 10% or greater intra-year decline in twenty-one of those years. On average, that’s one every other year! Here’s the noteworthy part: Of those 21 correction years, 14 of them finished the calendar year with positive index returns.[5]

Should you worry about stocks falling based on current fundamental factors such as high price-to-earnings ratios, or the growing likelihood that the Federal Reserve may soon raise interest rates to fight persistently high inflation? The answer depends on what actions you might take in anticipation of a possible downturn.

One common reaction to potentially negative market movement is to want to pull your money out and wait for the turbulence to recede. However, even if you intend to “sit it out” for only a short time, the odds of success are against you. History demonstrates that many of the market’s best days often follow its worst days, and the worst days naturally happen in periods of above-average volatility – such as during a correction.[6] If you miss only a handful of those best days it can have a meaningful impact on your portfolio. For example, if you missed the S&P 500’s five best return-days over the entire period from January 1980 through March 2020, your return would be a whopping 38% lower than if you had stayed invested in the index throughout the period.[7]

As famed mutual fund manager Peter Lynch once observed, “Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves.” And as Joni Alt, one of Evermay’s Senior Wealth Advisors points out, “You often don’t recognize you’re in a correction until you’re on the way out of one.” Translation: timing the market is extremely difficult, if not impossible.

The US stock market has been resilient throughout its history, and stocks have routinely recovered from negative short-term events to move higher over time. While “staying the course” and staying invested are generally the best broad courses of action, shifting fundamentals should, and do, precipitate changes to a portfolio’s holdings.

For example, as high current stock valuations may be indicative of more muted returns over the next several years, we are evaluating non-traditional asset classes that may provide relatively attractive returns compared to equities. Similarly, in anticipation of rising interest rates, we have targeted our fixed income allocation on high quality short-term bonds which should be less volatile than those with longer maturities and higher credit risk. And, as we regularly do, we will be rebalancing portfolios where asset class weightings may be over or under their strategic long-term allocation targets.

There are uncertainties to any outlook and surprises may happen, in the markets and in our personal and professional lives. We encourage you to reach out at any time to discuss your portfolio to ensure your mix of assets is appropriate and aligned with your financial goals. 

With best wishes for a healthy and prosperous 2022,

 

Mitch Schlesinger, Equity Strategist