If you have been paying attention to the markets or your investments, you probably already realize that something is going on. The markets have had the worst 4 months to start a year since 1939. We highlighted a lot of the why’s in our last blog post here. While April has historically been the best month of the year for stocks, this was unfortunately not the case in 2022. For the month, the S&P 500 had a drawdown of 8.8%, the Dow Jones Industrial Average declined 4.9% and the NASDAQ lost 13.3%. Bonds also had a bad month with the U.S. Aggregate Index down 4.7%. Year to date, the indexes have had the following returns:
|Dow Jones Industrial Average||- 9.24%|
|S&P 500||- 13.3%|
|U.S. Bonds (Agg Index)||- 9.7%|
Are these market drawdowns unusual?
It turns out that the drawdowns that we are experiencing are not that unusual, but it sure feels that way while we are in the middle of it. There is an old expression on Wall Street that says that “stocks take the stairs up and the elevator down”. If you look at the chart below, you will see that stocks on average have had an intra-year decline of around 14%. During that 42-year period, we also had 5 periods of more than a 30% drawdown, including most recently in 2020. Despite this, the markets have had positive returns 76% of the time.
Why are the markets selling off?
In one word; inflation.
As you can see in the chart below, the rate of inflation (how quickly inflation is rising) is the highest that it has been since the 1970s. The markets are not only pulling back from the fear of higher prices and eroding purchasing power but also from what the Federal Reserve needs to do in order to fight inflation. In 2020 when the world shut down due to the Covid-19 outbreak, the Fed (and most central banks around the world) aggressively fought against the economic slowdown with extremely loose monetary policy. At the time, that was desperately needed, but they left rates too low for too long and are now far behind the curve of normalizing rates. They are basically in a place where they have to do the opposite now and raise rates quickly to try to get inflation under control. Unfortunately, monetary policy is not an exact science and the pendulum usually swings too far in each direction. Right now this is one of the market's biggest fears, that rapidly rising rates will cause earnings to dip and cause a recession. Time will tell. The Fed is meeting this week and the expectation is a .50% increase in rates.
What should you do?
First, no matter what the pundits on T.V. or anyone else say, nobody can accurately predict the markets. What to do as an investor always comes back to; what are your goals and what is your risk tolerance? If you are a longer-term investor and have specific goals, an asset allocation model, and diversified investments, the historical statistics tell us in 10 years from now this will only be a blip on a chart. If you are going to be an investor in the markets, you have to accept that there are going to be periods of increased volatility and drawdowns.
If you are really uncomfortable about your investments and/or unsure about your goals and risk tolerance, and whether they match your specific situation, please reach out - we'd be happy to discuss your questions and concerns.