February 3, 2022
Dear Clients & Friends,
Stocks have gotten off to a rough start in 2022. The calendar had barely flipped into the new year, when we were all reminded that the return premium we expect to receive by investing in mainstream equities comes with a cost: volatility. The S&P 500 Index fell nearly 10% from January 3 through January 27 amid fears that the Fed will have to get a lot more aggressive to fight inflation, before staging a 4% rally over the last two days of the month to end January down 5.3%. After such a steady march higher in 2021, the dip may have caught many investors off guard.
For those whose anxiety levels may have risen last month, here are some numbers that may provide reassurance:
-- Since 1980, the average annual peak-to-trough decline in the S&P 500 has been 14.0% (source: JP Morgan). This year’s max drawdown is now 9.8%.
-- Since the end of WWII, after a correction of 10-15%, the S&P 500 Index has experienced an average one-year gain from the lows of 22% and has risen in 12 of the 13 one-year periods.
-- The average stock market gain one year after the first Fed rate hike of an economic cycle has been 11%, with gains the past eight cycles dating back to 1983.
-- When investor sentiment is mostly negative, as it has been recently according to the American Association of Individual Investors (AAII) investor sentiment survey, stocks have risen an average of 11% in the next year.
This data suggests that investors should stay the course-- which continues to be my advice. Most likely gains in 2022 will be much tougher to achieve than in 2021. They will likely be more modest and happen later in the year, which is typical during midterm election years.
The good news is that an inflation peak may be near as the spread of the COVID-19 Omicron variant slows down. Slower, but solid, economic growth this year will help cool inflation as the Fed begins to hike rates. We’re already seeing supply chain backlogs and bottlenecks start to clear. We should see more people jumping back into the labor force later this year, easing some of the wage pressures. We may also get some help from lower oil prices, though that may have to wait for Russia-Ukraine tensions to die down.
These uncertainties make the road ahead for stocks much bumpier. But with U.S. consumers and businesses in excellent shape, the U.S. economy may grow 4% this year, well above the pace of the last decade. Corporate America is showing once again during fourth quarter earnings season that it is thriving with S&P 500 earnings poised to increase by more than 25% year-over-year. Corporate earnings drive stock market returns over time.
Perhaps the stock market in 2022 will be like the exciting NFL playoffs we’ve seen over the past two weekends—with a lot of back and forth between the bulls and the bears before the bulls grinding out a win late in the game.
Please contact me directly with any questions-- that’s precisely what I’m here for.
-Nick
IMPORTANT INFORMATION
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 February 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 & JP Morgan.
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.
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