Market Update - January 2022
Hello all!
First off, I’m excited for the New Year despite having Covid last week. I thought it was an excellent time to provide an update. I’m not trying to sugarcoat it; the market is experiencing a downturn. However, we saw an incredible rebound on Monday, much like some of the football playoff games of the last weekend.
Fear about Russia/Ukraine and suspense over upcoming Fed meetings on interest rates are driving investor fear. We expected a correction from all-time highs and overvaluations for some of the top growth stocks. That’s why we were a bit conservative towards sacrificing some gains from mid ’21 on. It was a matter of if, not when it would happen, so I kept some liquidity on the sidelines, looking for a buying opportunity. Win, lose or draw, the Q3 rebalancing of your portfolios have us positioned in the event the market continues to decline and conversely if it were to go up from here. In addition to growth, one important measure of a financial advisor’s value is how they handle the market downturns, in other words, the preservation phase. I feel confident in where we stand today, and you should too.
As of the close of business on Friday, stocks have now reached correction territory. Year to date, the S&P 500 is down 7.8%, and the Nasdaq QQQ (top 100) is down 11.6% (1).
This is the first meaningful correction since the 5% correction in the 3rd quarter of 2021
Many of the large-cap names which have been supporting the market due to their concentrated size, like Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOG/GOOGL), have participated in this downslide and have retrenched from all-time highs in December
In my opinion, this has been inflation-led correction – and inflation concerns have superseded COVID as the number one concern on the street.
Questions surrounding inflation include:
Will the US consumer be able to continue to drive the economy with prices rising so fast?
Can companies offset raw materials and wage-price growth and still grow earnings?
How aggressive does the Fed need to be to curb price increases, and will it affect growth?
We are in the midst of corporate earnings season, but it is too early to say there is a distinct trend wave happening with earnings.
We know a lot about companies in the financials sector, where numbers are generally healthy, but expenses are rising.
We don’t have a significant number of companies reporting outside of the financials sector yet
We’ll know more in the next two weeks regarding trends and outlooks for companies but expect increasing expenses to focus on conversations
Based on what we see, we believe this is a normal correction in the stock market. The markets were pushed upward toward the end of 2021, and we are correcting that somewhat currently.
Currently, we aren’t expecting a dramatic shift in economic and market forecasts. Still, we are actively examining portfolios individually to find undervalued stock opportunities. As a result, this should create some increased activity in individual portfolios and the Tilt Series models.
For a review of our current outlook:
Bonds remain unattractive
The Barclays Bond Aggregate Index (AGG) is down 1.62% year to date (through Friday 1/21/22) (1)
The 10yr US Treasury has risen this year, but we expect it to continue to rise
We still think stocks can work higher through the year:
The US consumer is healthy, and high demand for goods and services combined with supply chain issues is one of the main drivers of cost increases
We believe COVID and the Omicron variant are at peak levels (and past peak for regions hit early), and falling cases/hospitalizations could lead to more significant activity and increased supply in the coming months
Collective US holdings in money market funds remain elevated, which could be used as the market stabilizes and investors look to take advantage of better pricing.
Lastly, while the Fed and inflation are headwinds, we believe they are manageable, and markets can continue to work even as interest rates rise from historically low levels.
For investors worried about further downside risk:
Having a portion of capital into Buffered Index provides the opportunity to protect from some downside risk while still offering upside participation
A slight reduction of risk that we’ve done in most portfolios is a way to protect from further downside. Still, there shouldn’t be a need to aggressively shift as clients are adequately balanced according to risk tolerance
As a reminder, we face corrections nearly every year in the markets. Staying invested through times like these while being prudent about risk and nimble to opportunities is how to achieve long-term financial objectives.
