January 2022 Market Update

 

Wow! What a difference a year makes. After the S&P finished up 27% for calendar 2021, 2022 has been off to a rocky start.

The S&P 500 is down about 7% through January and has been in or near correction territory over the course of the month while the Nasdaq 100 is down 15% from it’s record high. The CNN “Fear & Greed” Index, which measures investor sentiment, is hovering around 30 on a scale of 1 – 100 which indicates Fear. Meanwhile, the Fed has indicated a possible increase in interest rates in an effort to combat inflation concerns which is expected to be confirmed during their March meeting. Fed funds futures are pricing in a total of 4 rate hikes by the end of this year. Tensions between Russia and Ukraine are fueling geopolitical concerns which have added to market volatility.

With all these reasons to be pessimistic, defensive stocks such as energy have seen a boost. The energy sector is up approximately 15% year to date. By sector, this is the only positive return this year.

Barclays believes the S&P 500 still has 8% downside potential in the short term.

Now what?

As always, there are different views on what’s to come next. A recent article from Seeking Alpha believes this pullback is short lived and a derivative of the anticipated federal rate hike. The Federal Reserve minutes from December note aggregate demand was strong in the fourth quarter of 2021 and GDP is expected to continue its upward trend. As supply chains open and Omicron concerns wane in time, labor shortages should rebound, and the economy should continue to strengthen. From this perspective, it is believed the S&P will finish the year with modest gains.

Fundstrat, an independent market research firm, believes this fast decline could be met with just as fast of a recovery (Think of the V shaped recovery we saw in March/April of 2020). They believe investor sentiment is approaching maximum pessimism, which could indicate a floor to the market decline.

Barclays, the aforementioned fund company indicating the market floor is yet to arrive, also notes that while a fed rate hike can have short term impact, historically a rate hike has not knocked equities out of rallies and is holding its prediction of a year end close for the S&P 500 near 4,800. They also note that, on average, the S&P returns for years following a rate hike have historically been about 6%.

With both reasons to be bearish and bullish on the 2022 market, one thing remains constant. The general advice is to sit tight and ride the market cycle. It’s very difficult to know when we will hit bottom and begin to climb again. Attempting to time the market can be disastrous to long term performance. The average investor underperforms the market by 4%. Why? They let emotion dictate their decisions and have a propensity to sell low and buy high during times of market volatility (right now).

Having a financial plan can help to ease the anxiety associated with a market correction. Proper planning will have addressed the impact a downward market can have on reaching your goals and allow you to see what it means for you personally. Depending on your propensity for risk, there are products that can shield you from downward market cycles. The important thing is to be proactive and address proper planning which takes place outside of investment management alone.

If you have questions on your finances, investments, and proper financial planning, we welcome a meeting to discuss your needs.

 

 

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal.