For months we have talked about the US Market trading at 20-25% above fair value, which has led us to take a more neutral investment posture. We have set that strategy in motion to help during a potential corrective phase. So far in 2022, we have seen strong companies report all-time high earnings while their stock prices continue to slide. Pressure from supply chain disruptions, potential Fed interest rate hikes, Omicron, stock valuations and growing conflict between Russia and Ukraine are reminders that risk is present and visible. While volatility is a natural part of the market cycle, many investors have become accustomed to the extended bull markets like what we have experienced for the past decade. When recent volatility hit, recovery snapped back in weeks without a lingering bear market to follow. Reflecting on historical corrective phases broadens our approach to management moving forward, reminding me of lessons learned in 2011.
In 2011, the S&P 500 had a total peak to trough pullback of approximately 20% over a 6-month period driven by a handful of factors. The resulting ‘bear market’ created one of the best structural buying opportunities as emotional selloffs trumped rational investing. Early in the year, the markets grew as much as 8% riding tailwinds from 2010. In February, global stocks stuttered as political pressures in the Middle East and increased oil prices created turmoil leading to a -2.75% decline. A month later, markets recovered but an earthquake/tsunami led to a nuclear reactor meltdown in Japan, which caused an additional -5.5% loss. Appetite for risk was decreasing across markets after reacting to these smaller pullbacks; in July the US had whispers about a budget impasse. Over the course of a month, the markets shed -17% including “Black Monday” with a one-day drop of -5.5%. Later in the year, discussion of the EU fracturing took place where the market saw further drops of -9% and -10%. Markets recovered after each of these events and the year ended flat.
A look back in history also reminds us that those pullbacks present buying opportunities in the long run. Two years after the bottom in 2011, markets rose +55%. Expand those numbers to five years, and the markets rose +97%, and over 10 years the market grew over 300%. While none of us look forward to stressful short-term periods, we remind everyone to zoom out and look at the broader long-term perspective. Today’s setbacks represent opportunity during longer term investment cycles.
Pressures that are prevalent in the markets now remind us of structural issues from 2011. Whether the blips from early this year will turn out to be long-term is yet to be seen. We stand ready with a balanced approach to react as the market settles into its new normal. We don’t measure market returns in months and our approach is looking at 3-year rolling periods. We aim to take profits and prune when we see ‘irrational exuberance’ and investors are ignoring risk. At the same time, we seek discounts to buy-in when fear drives decisions for others to sell. During this recent bout with volatility, we are working with our research partners for a measured response on the buy side. Corrections are natural occurrences in the markets – typically with annually with drops of 10-15%. While that can create discomfort in the short term, it is a great opportunity to plan for long-term appreciation.
The attached graph gives a walk down memory lane of the investment journey that 2011 represented.
Cheers!
Jay
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.