In the Market & Economic Outlook, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
April Commentary & 1st Quarter 2022 Recap
Stocks were off to a sluggish start in 2022 with the S&P 500 Index down -4.9% for the quarter. Uncertainty is the main culprit as the Ukraine war, inflation, and impending Fed rate hikes weighed on investors. These conditions have led to the lowest consumer sentiment readings in a decade, which is often a harbinger of weaker economic conditions ahead.
Inflation may be the biggest challenge facing our financial system, as policies enacted during COVID have contributed to a 7.9% increase in inflation. In the 1980s, when inflation was similarly rampant, Fed Chairman Paul Volcker raised rates aggressively, which helped curb inflation. Will Fed Chairman Jerome Powell make the same decision this time around? Or will he fear triggering a recession with rate hikes that are too aggressive, and allow inflation to remain elevated?
Indications and expectations are that the Fed will take an approach like the period from 2017 to pre-COVID 2020, when rates increased by about 0.25% per quarter and went from 0.50% to 2.50%. Would that be enough to achieve the desired “soft landing” that the Fed seeks? Investors will need to brace themselves for not only policy missteps but the growing pains and market volatility that come with any period of change.
We think that the best course of action for investors is to remain committed to their long-term allocations, but use movements in the stock market to make incremental changes. For example, if the market rises, we would use that opportunity to sell and take profits. If the market retreats, we would take that opportunity to buy more stocks at lower prices. In either case, you are taking advantage of market volatility with a strategy that follows the basic tenets of investing: “Buy low, sell high.”
What we should avoid, however, are attempts at timing the market to avoid loss. Case-in-point: A study of the S&P 500 from 2006 through 2021 shows that staying invested through that entire period generated an annual return of 10.66%. Missing the best 10 days in the market during that same period yielded annual returns of 5.05%. That is not a typo: out of 5,475 calendar days it was a mere 10 calendar days that was the difference in doubling the investor’s return.
The central concern, at least for Americans, is the current state of inflation and how our leaders plan to address it. While their actions could lead to a fix, the path to lower inflation is full of unknowns and potential pitfalls that could just as easily result in inflation sticking around longer than expected, or worse, changing course and leading us into a recession. We recommend that clients remain disciplined with quality investments, avoid attempts at market-timing, and make modest changes as opportunities arise.