May 13, 2022 – We expect that recent market performance and news headlines have generated feelings of uncertainty and anxiety; that’s not surprising. As we look at the economic data, there is certainly some cause for concern:
GDP declined 1.4% in the first quarter of 2022
Inflation is at a 40-year high, although showing some early signs of peaking
Tighter fiscal and monetary policy along with the impacts from Russia’s invasion of Ukraine could weigh heavily on future economic growth
But there is also a lot of positive data points that often get overlooked:
The massive job losses (the worst since the Great Depression) experienced during the pandemic lockdown in 2020 have now been recovered
The unemployment rate is at 3.6%, near historic lows
Business investment grew strongly in the first quarter of this year and corporate profits remain high
Consumer spending and balance sheets remain at healthy levels
Higher bond yields imply greater expected future returns
During volatile times like we’re experiencing now, we seek to provide some perspective based on our experience. Here are a few things to consider:
It's important to look beyond the past few months. While the stock market is in the red for the year, zooming out paints a vastly different picture. The S&P 500 has gained 65% over the past three years, 22% since the pre-pandemic peak in early 2020, and 79% from the pandemic bottom. A smooth ride is not how the market operates. Instead, the price of long-term gains is the ability to tolerate short-term volatility and market declines.
You’ve heard us say "market volatility is normal". Markets can swing wildly even when there is little new information. This year, the S&P 500 has experienced four distinct 5% declines. While this may seem like a lot, the average year experiences four to five of these pullbacks, most of which recover in weeks or months. The pandemic caused 12 such pullbacks in 2020. There were eight in 2019 during the global growth scare - a time when many expected an immediate recession which never materialized.
What drives markets in the long run is the vibrancy of the economy, the strength of the consumer, and the profitability of companies large and small. We refer to these as the fundamentals. While we won’t get the 40% plus growth we saw last year, profits are expected to grow in the 7-10% range. This is healthy and in-line with long-term averages.
While we are tapping into our network of experts to gain a wide variety of viewpoints, nothing we have heard leads us to believe we should make significant changes across client portfolios, nor do we think these are markets where you want to transact unless you must. If you have expected expenses over the next 6-12 months that you may need to tap your portfolio for, we encourage you to evaluate your cash reserves and share that with us so we can plan strategically and accordingly.
We’re here to help you every step of the way, regardless of market conditions. Please don’t hesitate to contact us if you have any questions or concerns about your specific situation. We are always happy to hear from you and provide our advice and perspective.