April 7, 2022
Dear Clients & Friends,
According to the wisdom of revered investor Sir John Templeton, who famously said "bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria”, it appears the market may have a bit more in the tank. The S&P 500 Index increased 3.6% in the month of March, which now means the market has clawed back more than half its losses from the lowest point of 2022, when stocks were down 12.5%. This remarkable turnaround comes despite the backdrop of war in Ukraine, inflationary pressures, and rising interest rates.
In the short run, the path forward for the market will only be partially defined by Federal Reserve policies, global diplomatic efforts, and interest rates. The other key factor to keep an eye on is corporate earnings, which remain strong. Also, the labor market is almost back to pre-pandemic levels, which is another good sign for the economy. However, I still hear plenty of skepticism coming from the financial media, despite market fundamentals remaining solid.
Historically, geopolitical events have typically dented market sentiment for a period, but stocks have shown a tendency to rebound quickly once the initial pessimism wanes. Past performance is no guarantee of future outcomes of course, but the latest market rebound seems to fit this historical precedent. It is impossible to predict how the war in Ukraine will be resolved or much less when, but the key for investors is to stay focused on what you can control.
Meanwhile, the Federal Open Market Committee announced in March that it would raise interest rates for the first time since 2018 in response to rising inflation. The annual inflation rate in the U.S. jumped up to 7.9% in February, which is the highest number since 1982. The Fed's decision to raise the fed funds rate came as no real surprise, since they have been telegraphing their playbook for months. We should expect further tightening throughout the year.
Finally, the third pillar in the latest wall of worry is new concern over the yield-curve inversion. Recently, the 10-year Treasury yield fell below the two-year Treasury yield, which has been an indicator of economic recessions in the past, but not always. This happened back in 1998 and 2005 and no recession immediately followed. So, I humbly agree that yield curves may tell a cautionary tale and the media is always quick to report on it, but given the overall strength in the economy it does not appear a recession is imminent.
To sum it all up, March taught us that staying the course is always the most prudent investment decision to make. We all thought volatility would return in 2022, and it certainly has, yet quality stocks still represent the best opportunities for investors. In my view, financial conditions remain favorable, earnings will likely continue to surprise to the upside, and economic data in many corners of the economy remain constructive. These elements lead me to believe that recent market skepticism was overdone and that we still have a ways to go in the current business cycle. I still can't find anyone who is feeling "euphoric" about this market-- but please call me when you do.
As always, thank you for your trust and confidence. Please contact me directly if you have any questions.
-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 April 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.