The future markets: 2022
The United Nations is forecasting lower global economic growth for 2022 and 2023. Liu Zhenmin, the U.N. undersecretary-general for economic and social affairs, said at a news conference on January 22nd that “We are still living in a time of great uncertainty. After expanding at a 5.5% rate in 2021 -- the highest rate of global economic growth in more than four decades. The world economy is projected to grow more slowly in 2022 and in 2023. He added that “At the start of 2022, the global economic picture in the market is still murky.”
For the first time in a very long time, January showed investors that the stock market does not always rise. Huge intra day gyrations and daily swings of 1000 points or more have been more frequent this month, investors will see monthly statements at a loss. While the daily market movements have been large, the first month of 2022 will end with the S&P 500 down less than 5%. All asset classes including stocks, bonds, and real estate have been hit hard.
To explain the volatility we are seeing it might be helpful to use an analogy. Think of a patient that gets into a car accident and needs a significant amount of medication. At some point in the future, as the patient recovers, it will be necessary to withdraw and reduce the meds.
Similarly, when the pandemic started, the Fed jumped into action and gave the financial markets and the economy a tremendous amount of “medication” by lowering interest rates and quantitative easing programs. Essentially the government was pumping money into the system to keep markets liquid and functioning normally. Now that the economy is in recovery, the Fed is beginning to “taper” the medication. We should expect withdrawal symptoms as the government begins to ween the economy off of the stimulus. Economies exhibit VOLATILITY as a normal reaction to the change.
To exacerbate matters, INFLATION has reared its ugly head rising at its fastest pace since the 1970’s necessitating the need for the FED to reduce medication faster than it might it had planned.
Other areas of concern to investors are:
Earnings outlooks and guidance have been mixed, but generally weaker than hoped.
Supply chains are still a mess.
Tech & high growth stocks have been beaten down because these industries are typically more sensitive to rising interest rates. The major indexes are heavily weighted in “Big Tech” so when Big Tech drops so do the indexes.
Our opinion is that the current market behavior, include the January drop is a healthy and normal part of the historic and typical market patterns and economic cycles. The steady rising market we experience from April of 2020 through December of 2021, and the lack of volatility is what was abnormal. We believe that volatility will likely continue until more clarity from the Fed is achieved and valuations become more reasonable.
Our portfolios are well positioned for the current market volatility. In anticipation of this, we proactively took steps late last year to rebalance our portfolios in the following ways:
We increased our allocation to commodities in anticipation of rising inflation
We sold off some of our large growth stocks to lock in profits and we increased allocation to large value stocks because value stocks generally perform better during times of rising interest rates
We increased our allocation to hedged equities, providing additional down side protection for our portfolios in the event of a market correction
We reduced bond sensitivity to interest rates by investing in shorter term bonds and floating rate bonds, both of which perform better when interest rates rise
The rebalancing steps that we took late last year are doing exactly what they were designed to do, reduce volatility in your portfolio and preserve capital. We will remain vigilant in monitoring these market developments and adjust our holdings, as necessary.
If you have any questions, feel free to call or email us at the office. Thank you for your ongoing trust in the Simmons Capital Group Team.