Markets have been incredibly volatile to start 2022, heading into correction territory. Each day continues to bring unique bounces up and down to a near-historic level intraday for those of you watching.
Weird, right?
Not really. These things happen when investors get jittery.
So, what led to the giant selloff?
A few things:
- Fears around the Federal Reserve raising interest rates and what rapidly removing support could do to markets and the economy2
- Inflation worries (it’s at a 40-year high)3
- Tech earnings4
- A potential hot war in Ukraine5
The bottom line is markets are being driven by fear, anxiety, and uncertainty.
Could we see a bear market or severe corrections in the weeks ahead?
It’s very possible.
Corrections happen regularly; it wouldn’t be surprising to see continued volatility or significant drops.
Here’s a chart that shows intra-year dips in the S&P 500 alongside annual performance to illustrate how often markets take a dive.
(The red dots show the market drops each year.)
What’s the big takeaway?
- 14 of the last 22 years, markets have dropped at least 10% intra-year6
- 7 of the 14 years, the market ended the year with a positive return
We’re dealing with a lot of uncertainty, and investors are feeling understandably cautious, but that doesn’t mean we should panic and rush for the exits.
It is also critical to note that stock returns are volatile, but nearly a century of bull and bear markets shows that good times have outshined bad ones.
The stock market’s ups and downs are unpredictable, but history supports an expectation of positive returns over the long term. For the best shot at the benefits the market can offer, stay the course.
From 1926 to 2020, the S&P 500 Index experienced 17 bear markets or a fall of at least 20% from the previous peak. The declines ranged from -21% to -80% across an average length of around 10 months.
On the upside, there were 18 bull markets or gains of at least 20% from a previous trough. They averaged 54 months in length, and advances ranged from 21% to 936%
When the bull and bear markets are viewed together, it’s clear equities have rewarded disciplined investors.
We have no idea how long this wild ride will last.
And there are plenty of bright spots on the horizon in terms of employment, earnings, economic growth, and COVID.1
While no one likes seeing their account balances decrease, this type of volatility highlights the importance of having a plan and being diversified.
As a quick reference point on diversification, a good proxy for technology companies is the Invesco QQQ Trust (Ticker: QQQ), which is down about 14% YTD as I write this article.
In contrast, a proxy for Large Value companies, the Vanguard Value ETF (Ticker: VTV), is only down 3.5%.7
For retirees, market downturns could create stress and uncertainty in the absence of a plan.
The funds we have allocated into our clients’ Now Bucket and Soon Bucket provide stability and reliability to generate the income needed without having to sell while equities and stocks are down, ultimately avoiding sequence of returns risk on the nest egg.
The time horizon provided by the Now and Soon Buckets allows us to weather the storm that comes with these market pullbacks.
With the Soon Bucket invested with a conservative and defensive framework, we do not subject this money to the same downside exposure that the broad markets would face.
This could be the start of a buying opportunity for our clients who are still accumulating.
For example, you could accelerate your 401k contribution so that more money goes into the 401k right now vs. contributing a little bit throughout the year to take advantage of getting money invested right now. It could be a great time for our business owner clients to make your SEP IRA or Solo 401k contributions, putting that capital to work in a down market.
If you have cash on the sideline, it may be a good time to start dollar-cost averaging into these volatility trading days.
We are also reviewing the portfolios to see if, based on current asset allocation targets, rebalancing now can help drive better long-term returns. For example, if you were invested in a balanced portfolio comprised of 50% fixed income/alternatives and 50% equities, the current pullback of equities may have changed your allocation to be 60% fixed income and 40% equities. This would present an opportune time to rebalance the portfolio back to 50/50 by selling 10% of the fixed income and using those funds to buy more equities while prices are down.
Just as now could be an opportune time to sell fixed income to buy equities, we follow this same rebalancing methodology throughout the year. For example, last November, when equity values were high due to the 2021 bull market, we took gains by pairing back equity allocations to purchase fixed income.
The mathematically driven rebalancing process is a great way to continuously buy low and sell high in a volatile market. Rinse, wash, and repeat!
If there was ever a time to consider a Roth IRA Conversion, a market downturn is optimal.
By converting when prices are down, you are essentially getting a discount on the tax you pay for the conversion while now holding the same shares in your Roth account. At some point, the markets will rebound, and wouldn’t it be great to experience that rebound in your Roth IRA vs. your 401k or traditional IRA?
Our team is watching markets closely, and we will be in touch if we need to make some changes to current portfolios.
Be well,
Dave Alison, CFP®, EA, BPC
President | Founding Partner
Prosperity Capital Advisors
Sources
1 https://www.cnbc.com/2022/01/23/stock-market-futures-open-to-close-news.html
2 https://www.cbsnews.com/news/stock-market-down-federal-reserve-inflation-earnings-2022-01-25/
3 https://apnews.com/article/consumer-prices-inflation-c1bfd93ed1719cf0135420f4fd0270f9
4 https://fortune.com/2022/01/24/apple-microsoft-tesla-earnings-reports-tech-stocks/
7 https://finance.yahoo.com
Past performance is no guarantee of future results.
Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
In USD. Chart end date is December 31, 2020; the last trough to peak return of 70% represents the return through December 2020. Due to the availability of data, monthly returns are used from January 1926 through December 1989; daily returns are used from January 1990 through the present. Periods in which cumulative return from a peak is -20% or lower and a recovery of 20% from trough has not yet occurred are considered bear markets. Bull markets are subsequent rises following the bear market trough through the next recovery of at least 20%. The chart shows bear and bull markets, the number of months they lasted, and the associated cumulative performance for each market period. Results for different time periods could differ from the results shown. A logarithmic scale is a nonlinear scale in which the numbers shown are a set distance along the axis, and the increments are a power, or logarithm, of a base number. This allows data over a wide range of values to be displayed in a condensed way.
Source: S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.