June 2, 2022
Dear Clients & Friends,
This has been a very challenging year for investors. The S&P 500 Index, which measures the broad market performance of the US stock market, came dangerously close to falling into bear market territory last month. The technical definition of a bear market is when the Index closes down 20% from the most recent market high. On May 19, the Index finished the trading session down 19% from the January 3rd all-time market high, just narrowly escaping "official bear market territory". So while the bull market in stocks continues to hang on for now, we are most definitely not out of the woods yet.
Typically when stocks prices fall, investors can seek stability from their bond portfolios, however bond investors have not fared much better this year either, as rising interest rates have pushed down bond prices. The losses in the bond market have made the stock market volatility feel even more painful. Markets don’t like uncertainty but we are getting a healthy dose of it this year, as the market continues to digest higher inflation, tighter Federal Reserve monetary policy, draconian China lock-downs, global supply chain issues, and the Russia-Ukraine war.
Investing mistakes often take place during periods of elevated market volatility. One of the most common mistakes is trying to time the market by jumping in and out at just the right time. Market timers must be right twice and timing the return back into the market can be extremely difficult to pull off. Markets can turn quickly and missing even just one big up day can significantly reduce returns over time. The biggest daily gains tend to come in down markets, making them especially difficult to predict. We saw this same phenomenon play out during the Corona Crash, with six of the top thirty best return days in the last 30 years occurring in the middle of that sudden market drawdown. As the old adage goes, “it is about time in the market, not timing the market”.
When markets are shaky, it can be helpful to look to long-term fundamentals that have provided the foundation of positive returns for stocks and bonds over the long run. For stocks, gains depend on the ability of corporations to grow earnings, which they have continued to do during first quarter earnings season—S&P 500 Index earnings per share are on track to increase 10% year over year. For bonds, the key fundamental has simply been the ability of borrowers to make required payments. Corporations and consumers currently enjoy strong balance sheets and have the financial firepower to pay their debts. While the future is always uncertain, it appears these key fundamentals continue to remain in place.
Even against a potentially supportive fundamental backdrop, the volatility we’ve seen in stocks this year is not unusual. Although negative returns for a full calendar year are infrequent, intra-year corrections are fairly common. Since 1980, the S&P 500 Index has been negative for the entire calendar year just seven times, but the average decline within any year has been 14%. Mid-term election years have tended to see increased volatility early in the year, as the honeymoon period for a new president ends and political uncertainty rises. Inflation can also be challenging. Years with inflation over 5% have seen more frequent stock market declines than a typical year, but stocks have still been higher more often than not.
Amid the global economic and geopolitical uncertainty, the domestic core economy is still quite stable. Weekly consumer spending data is above typical baseline levels. Job seekers are participating in a tight labor market with twice as many openings as unemployed people. Businesses are enjoying high profit margins despite cost pressures. The economy is expected to grow in the latter part of this year after a surprise contraction in the first quarter, though the growth path may be bumpy as monetary policy is re-calibrated from accommodative to moderately tight and consumers and businesses adjust to higher borrowing costs. Nonetheless, the base case from LPL Research is still above-trend economic growth for 2022.
At Mercer Partners, we believe patient and disciplined investors stand the best chance of meeting their long-term goals. No one has a crystal ball, but at lower valuations, history suggests the chances of achieving above-average returns going forward is rising. The stock market will once again resume its permanent upward advance— it always does! We know it is tough to stand firm during times like this, but we continue to counsel staying the course and working your financial plan. We have prepared for this and we'll get through it together.
Should you want to talk further please give us a call—that is what we’re here for. It is a privilege to serve you!
Nick Enzweiler is registered representative with, and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Strategic Wealth Advisors Group, a registered investment advisor. Strategic Wealth Advisors Group and Mercer Partners Wealth Management are separate entities from LPL Financial.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of June 1, 2022.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.