Volatility is back and the Nasdaq just had its worst month since 2008.1
We remain committed to growing and preserving the funds you have entrusted to us.
We hope our proactive approach to risk management brings you and your family some financial confidence.
You may recall our last quarter’s missive entitled “Mr. Toad’s Wild Ride…”
Over the last few months our process led us to lower risk. This means we raise cash, shift to less risky stocks and add high quality bonds.
For some strategies we added gold and shorted stocks for the first time in nearly two years.
We believe these actions should help if the market continues lower, but investors should remember that no market goes straight up or straight down.
We don't know how long this wild ride will last, but for now we remain cautious.
The Fed is tightening, economic growth is slowing, and consumer confidence is falling to a 10 year low.
This is not an environment to take excessive risk.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.
- DJWM Mr. Toad’s Wild Ride Email 2/4/22
So, let’s talk about what’s behind the latest wild market ride.
What led to the selloff?
Primarily, a slowdown in economic growth which slowed earnings growth.
A report just came out showing the economy shrank by 1.4% in the first three months of 2022, surprising analysts who expected positive growth of 1.0%.2
Though a single quarter of negative growth isn't a recession, we do believe an earnings recession is extremely likely.
Realistically, some form of a slowdown was probably inevitable, given changes in Washington.
Over the past two years, the Fed added some $5 trillion to its balance sheet, and Americans received another $5.5 trillion of stimulus. Some of that stimulus found its way into stocks, crypto, and even something called NFTs. Annual flows into ETFs doubled from 2019 to 2021.3
Source: Refinitiv Lipper data
But, to quote Jack Nicholson’s character Melvin Udall, what if this (2021) is as good as it gets?
This stimulus combined with supply chain bottlenecks and the invasion of Ukraine to create the worst inflation in 40 years. This acts as a tax on consumers. In the past, peaks in oil prices preceded peaks in GDP by an average of 5 months.4
We already see the US savings rate beginning to fall as a result of inflation.
Politicians have been reading the polls and responding to voters who are focused on inflation.5
As their policies shift from stimulating growth to fighting inflation, the result is a slowdown in economic growth.
Could we see a bigger correction or bear market?
Absolutely. That's very possible.
Corrections and pullbacks happen very frequently – especially when the Federal Reserve is tightening. Currently, the market believes the Fed will raise rates 10 times in 2022. The Fed wants to slow inflation, but to do so it must slow the economy. Investors are coming to realize that the Fed is playing a game of chicken with the markets. For our part, we would not be surprised if the Fed blinks long before they get to 10 rate hikes.
Here's a chart that shows intra-year dips in the S&P 500 alongside annual performance. (You've probably seen this chart before.)
Take a look at the red circles to see the market drops each year.
The big takeaway? In 14 of the last 22 years, markets have dropped at least 10%.6
However, that doesn't mean that we should hit the panic button.
In terms of corporate earnings and government stimulus, maybe 2021 was as good as it gets.
But that’s why we proactively reduced stock risk in our discretionary strategies over the last 6 months, and we continue to look forward to an excellent buying opportunity ahead.
1 - https://www.wsj.com/articles/global-stocks-markets-dow-update-04-29-2022-11651217787
2 - https://www.cnbc.com/2022/04/28/us-q1-gdp-growth.html
3 - https://www.reuters.com/markets/europe/global-markets-etf-graphic-2022-01-21/
4 - https://digitalcommons.mtu.edu/cgi/viewcontent.cgi?article=1744&context=etds
5 - https://news.gallup.com/poll/392159/inflation-concerns-fueling-low-economic-confidence.aspx?utm_source=alert&utm_medium=email&utm_content=morelink&utm_campaign=syndication
6 - https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf
7 - https://www.marketwatch.com/story/heres-how-stocks-perform-around-midterms-in-one-chart-2018-09-11