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Staying Anchored to the Investing Principles - January Market Update

January 20, 2022
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Should you have any questions regarding these notes, please do not hesitate to contact Kevin at (678) 401-6102

At-A-Glance

7 min read

  • The stock market began 2022 by experiencing another bout of volatility, including its third decline of 5% in the last five months.
  • The jobs report was released on Friday, January 7th. While the unemployment rate ticked lower, the number of jobs created was again disappointing at approximately 1/2 of what was expected.
  • Volatility was largely due to uncertainty around the Omicron variant of COVID-19, and the Federal Reserve Bank taking a more aggressive stance against stubbornly high inflation.
  • While the pickup in volatility is uncomfortable for many, it is completely within normal ranges and should be expected.
  • Staying diversified, not making emotional decisions on day-to-day news and moves of the market and rebalancing regularly are the cornerstones to long-term investment success.

   

The investment committee met on the afternoon of January 10th to review our portfolios, investment strategies, and recent economic reports and activity. We are happy to report that the model portfolios managed and tracked by the committee for the benefit of our clients continue to perform in line with their risk-adjusted, index-based benchmarks. This is good news, given the volatility that we have seen over the last several months.

  

Volatility Due to Uncertainty

To that end, the US stock market began calendar year 2022 in a similar manner to what we saw over the last few months of the previous year. We experienced our third drop of 5% or more in the last five months. This matched the sell-offs we saw in September and late November. Given the inflation outlook, political uncertainty and recent economic reports, the committee expects volatility to continue throughout the year.

While a pickup in volatility is always concerning, we want to remind you, our trusted friends, and clients, that volatility is normal and expected in the financial markets. As a matter of fact, as you can see from the chart below provided to us by our friends at JP Morgan Asset Management, the stock market has averaged an intra-year drop of 14% since 1980. However, the S&P 500 produced positive results in 32 of the 42 years tracked in this chart, meaning that more than 75% of the time the market was positive, even with this level of volatility.

Volatility has been exacerbated recently by the Omicron variant of COVID-19, as well as ongoing inflation pressures. A significant pick up in Covid cases, even among those who are vaccinated, has created problems for many businesses, as workers are forced to quarantine. This could put further strain on supply chains. There is also concern that some southeastern Asian economies, especially China, could have additional shutdowns due to their zero Covid policies.

As you can see below, recent inflation measures continue to show inflation running at the highest level in nearly 40 years. This has caused the Federal Reserve Bank, which for many months told us that inflation was temporary or transitory, to reverse course and state that they will take up a much more aggressive stance to fight these mounting pressures. This includes rapidly reducing the amount of bonds they are purchasing on a monthly basis. This could reduce demand and cause longer-term interest rates to rise. The committee will track this closely. 


A Massive Shift in Policy

In the summer of 2021, the Fed had told us they expected no interest rate increases for calendar year 2022. They now expect at least three interest rate increases, and several Fed Governors are calling for more action to keep inflation pressures from mounting. This is a massive shift in policy in a relatively short period of time. As a reminder, as interest rates rise, bond prices drop. 2021 was only the fourth time in the last 30 years that the bond market produced a negative return. We have not seen back-to-back years of loss in the bond market since 1958-59. That streak could be in jeopardy, given the Fed’s stated intentions.

Also, the jobs report was released on Friday, January 7th. The number of jobs created came in at 199,000, less than 1/2 of what was expected. However, the household report showed a slightly more optimistic picture, which allowed the unemployment rate to drop to 3.9%. This is a level that is widely associated with full employment. This gives the Fed additional cover to take a more aggressive stance against inflation.

In times of uncertainty and volatility it is important to remain anchored to the investing principles that have historically led to long-term success. This includes not reacting emotionally to day-to-day news and noise coming from financial market headlines. It is also important to stay diversified and to rebalance your portfolio on a regular basis. This allows you to systematically buy low and sell high. This allows you to let volatility work in your favor. While we do not see any signs of a recession on the horizon, we will continue to monitor developments closely.

Source: ClearBridge Investments

  

Final Takeaway

The committee will continue to track what is going on in the economy and markets as we move into the new year. We believe that the market is in a mid-cycle growth phase, which could last for several more years. This should give us the opportunity for further gains, against the backdrop of higher volatility. We will continue to be diligent on behalf of our clients and the assets you entrust to us. Thank you so much.

Should you have any questions regarding these notes, please do not hesitate to contact Kevin at (678) 401-6102

 

Members of the Investment Committee

  • Jesse Hurst, Financial Advisor - Chair, Impel Wealth Management

  • Kevin Myers, Financial Advisor - 30A Wealth Management

  • Clint Gautreau, Financial AdvisorHorizon Financial Group

  • Nathan Ollish, Financial Advisor - Impel Wealth Management

  • Joy Schlie, Financial AdvisorFHT Financial Advisors

The views stated in this piece are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards.