Should we be worried?
Not necessarily. These things happen pretty regularly, especially when headlines are negative. In fact, you might recall that we kicked off 2022 with a big drop.2 So, let’s talk about what’s behind the latest wild market ride.
(Scroll to the end if you want to skip right to the reassurance.)
What led to the selloff?
Primarily, economic worries.1 Worries about new COVID-19 surges, war between Russia and Ukraine, inflations impact on the U.S. economy, and rising interest rates.
A report just came out showing the economy shrank by 1.4% in the first three months of 2022, surprising analysts who expected positive growth of 1.0%.3 Though a single quarter of negative growth isn’t a recession, it’s a sign that inflation, the Ukraine conflict, and the pandemic hangover are weighing on the economy.
Realistically, some form of a slowdown was probably inevitable, given the massive economic recovery of 2021. Restarting an economy, or better yet allowing U.S. consumers to come out of lockdown, created a mad rush surging effect for demand. I liken this to reverse child psychology. Tell a 4-year-old, “Don’t pick up those toys and put them away” and see what happens. However, once the surge is over, it’s only natural for demand to regress back to normalcy.
And, the news isn’t all gloom. 1) This is a preliminary report, so we’ll see revisions later. 2) Economists still believe the economy has plenty of room to grow, particularly given the strength of the job market, so the economy could rebound. 3) Americans are continuing to spend.4
Is the economy is still strong, is it showing any cracks? We’re watching closely and the coming months will show us a lot of data. For now, I continue to put faith in the job postings. Any sign of weakness in the business sector, employers are smart and will pull back on job postings.
You can see a theme: markets are being driven by worry and fear.
Is the selling done? That’s impossible to say. But if you’re feeling more uncomfortable with the markets today than ever before, there’s a reason for that. Roughly 86% of trading days in 2022 have experienced greater than 1% intraday trading swings. Any guesses to the last time we’ve seen this type of volatility??? Bueller, Bueller….
Let’s try 2008 (90%) and 2009 (86%) on for size. This was during the financial crises when names like Bear Sterns, Countrywide Financial, Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch, Wachovia, General Motors, and Chrysler, etc…. failed. This doesn’t seem remotely that bad.
Could we see a bigger correction or bear market?
Absolutely. That’s very possible. Corrections and pullbacks happen very frequently. As a matter of fact, we’ve seen some individual stocks in correction mode already and some are setting new all-time-highs.
Here’s a chart that shows intra-year dips in the S&P 500 alongside annual performance. (You’ve probably seen this chart before.)
Take a look at the red circles to see the market drops each year.
The big takeaway? In 14 of the last 22 years, or 63% of the time, markets have dropped at least 10%.5 We’re dealing with a lot of uncertainty in 2022 and investors are feeling very cautious about the future. However, that doesn’t mean that we hit the panic button and exit our strategies. Knee-jerk reactions to market turbulence can be VERY costly. In the chart above, imagine exiting the market in 2008 only to return in 2010 when you may have felt more comfortable. That mistake would have been very costly. Always keep things in a clear perspective, stay disciplined, and have a clear strategy with your investments.
Questions? Concerns? Reach out to us.
