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What a Difference a Year Makes

What a Difference a Year Makes

January 24, 2022

Difficult start to New Year for Markets

Blame rising rates, geopolitical tensions, inflation, COVID, supply chain disruptions, or the general over-exuberance of investors of the past 18 months – but markets are off to a poor start for the year.

The most speculative stocks and investments (the kind I stay away from) have been getting crushed.  The S&P 500 Growth index is down almost 12% for the year (only 3 weeks in!) while the S&P 500 Value index is down less than 4%.  I would like to create a “Naivete index” consisting of the silliest investments of the pandemic.  “Meme stocks” Gamestop and AMC (movie theatres) have lost half their value since November.  Bitcoin and other crypto currencies have fared even worse, down over 50% from their highs.  An investment needs to increase by 100% to make up a 50% loss!  A return to sanity perhaps? 

Bonds have offered only scant protection to stock investors.  Due to the expectation of higher interest rates, bonds have been falling this year as well.  The Barclays composite bond index is down 1.6% on the year. As I've noted before in this space, the expectation that bonds will rise when stocks fall doesn't hold up well if the enemy is inflation and rising interest rates.  

Our client portfolios are holding up well in this difficult environment.  Interest rate increases are not completely unexpected.  We have tried to limit our exposure to interest rate risk even while doing our best to keep our portfolios well diversified.  At the same time, our stock fund investments have long been weighted toward the most conservative end of the spectrum, and we leaned even more heavily in that direction coming into this year.  This “value bias” had hurt us a little during the pandemic crash and stock run up in 2020, but it has been paying off well in 2021 and even more so this year. 

There is still a lot of uncertainty out there.  (but isn’t there always?).  How long will inflation last?  How high will the Fed have to hike rates?  To some extent, in the long run at least, higher rates may be good for savers and conservative investors – but too much of a good thing may stall the economy and inflict pain on both bond and stockholders in the short term.  And then there is Russa.  Sanctions that may be imposed in the event of an invasion of the Ukraine could have significant ripple effects through the economy and markets.  I suspect this risk is somewhat underappreciated by markets.    

So far, things feel a lot like they did in late 2018. Then, as now, underlying economic conditions were strong.  Then as now, fears were of inflation and interest rates, as well as instability in some emerging market economies.  The result was a rapid and intense selloff in stocks from October through Christmas.  Stocks lost almost 20% of their value in that 3 month period.  Bonds didn’t help much on that occasion either, since markets were worried about rate increases.  As fears receded, markets quickly recovered, gaining back all their lost value in a matter of a few months in early 2019.  If COVID relaxes its grip, the Russa crisis resolves itself without massive sanctions, and inflation responds to Fed hikes and an easing supply chain crunch – then we may see a similar pattern this time around.  But it appears at least in the short term we are going to have some rough going. 

I am not in the predictions game as you know.  I don’t know what will happen in the world tomorrow.  Inflation may recede - it may get worse.  Russia may invade Ukraine - or not.  I do know that a steady hand and consistent investment strategy has always been the right prescription in times of volatility, and I don’t think this time around is any different.  For my investment clients, I will do my best to be that steady hand and keep you informed as events unfold.