There has been nowhere to hide in 2022.
Year to date, through May 5, the S&P 500 is down 12.99%, while the tech-heavy Nasdaq Composite is down over 21%. This marks the worst start to the year for the Nasdaq ever and the worst start for the S&P 500 since 1939 when the S&P index was made up of only 90 companies. Market returns have been acutely painful for non-index investors, with the average stock in the S&P 500 down 23%, while almost one-third of S&P 500 stocks are down 30% or more.
What about in the (supposedly “safe”) fixed income markets? Through May 5, the Bloomberg Barclays US Aggregate Bond Index was down 10.59% for its worst start to the year ever. What about US Treasuries? The ICE BofA Treasury Index is down over 12%, while long-dated Treasuries are down almost 23% in 2022. These are astonishing fixed income returns for such a short period of time, and keep in mind these returns are pre-inflation.
And let’s not forget the ultimate safe haven – cash. Unfortunately, with inflation at forty-year highs, those that have held cash have had their purchasing power eroded by 8.5% in the last twelve months.
Even gold is negative over the last twelve months after accounting for inflation.
All in all, this has been one of the most uncomfortable starts to a year an investor could have. So, what should we do, where do we go from here, and what does this all mean for investors?
First and foremost, we would encourage investors to zoom out. Even if you include market returns through the May 5th selloff, the S&P 500 is still positive in the last twelve months. Did you feel comfortable last spring as the markets were hitting all-time highs? If your answer is yes, then all else equal, you should feel comfortable now. What if we look back further? From the March 2020 bottom to the end of 2021, stock market returns were nothing short of astronomical. The S&P 500 and Nasdaq Composite doubled, rising 119% and 131%, respectively. Through May 5th, the S&P 500 still hovers over 90% above the March 2020 bottom.
Let’s zoom out a bit further. From 2009 through 2021, market returns were phenomenal. In fact, the S&P 500 compounded at 16.55% for 13 years, turning $100,000 into over $730,000.
Keep in mind, this was during a period of multiple 20% corrections, several government shutdowns, a European debt crisis, Brexit, 3 presidential elections, a global pandemic, and many more events that, at the time, seemed borderline apocalyptic. If investors stayed the course over the last decade, they are more than well equipped to handle a year of subpar returns.
Second, we encourage investors to keep in mind that volatility is a feature, not a bug, of markets. The S&P 500 has compounded close to 10% a year for 100+ years, turning a $1,000 investment in 1928 into close to $4 million in 2022. Those returns come with a price, and that price is volatility and uncertainty. Remember, the average intra-year drawdown for the S&P 500 going back to 1928 is over 16%, and a loss of over 20% happens every other year, on average. The point is, while it’s uncomfortable and painful, the market volatility this year is nothing out of the ordinary and should be entirely expected. If it was easy and markets simply went up 8-10% every year, then everyone would only own stocks.
So, where do we go from here? Keep in mind, the most important driver of long-term stock prices, earnings, continue to hold up well. Corporate profitability remains near all-time highs as well, as companies have boosted prices and flexed operating leverage.
The labor market is roaring with over 7 million jobs added in the last year and unemployment claims at 50 year lows, the US economy is still expected to grow over 3% in 2022, corporate capex continues to be extremely strong, credit card data shows spending that is on fire, and consumers are still sitting on over $2 trillion in excess cash built up from fiscal support and limited spending options over the last two years. We say all of this to reiterate the fact that, as of now, the economy is well equipped to absorb the tightening of financial conditions that we are seeing in 2022, and the door hasn’t closed on a soft landing. At the same time, inflation has likely peaked and should roll over as we move toward the back half of 2022 and spending shifts from goods to services, allowing the Fed to potentially ease off on rate hike plans later this year.
So, what is there to do? If you consider yourself a long-term investor, then not much at all. It’s certainly not fun now, but we will look back on this episode in ten years and barely notice the small blip on the chart. We encourage our investors to look at this market jitteriness simply as the cost of admission for outsized long-term market returns. We would also encourage them to accept that it is an admission worth paying.
Connor R. O’Brien
Trust Investment Officer
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or firstname.lastname@example.org.