Written by: Benjamin Bimson CIMA®, CMT® / CIO, Trek Financial
2022 has kicked off with a bout of volatility in nearly every asset class. At the time of this commentary, the NASDAQ is locked in a correction that began in late 2021. There is a rotation in investment theme from high-price to earnings stocks to more value-oriented companies that have strong balance sheets and strong earnings. Interest rates have risen in longer term treasuries relative to short-term treasuries, often called a flattening yield-curve.1 And this has been unsettling to some investors.
Certainly, after nearly two years or very robust returns in risky assets, it is not surprising that volatility has returned to haunt investors. Periods of time following large positive moves in investment returns are often followed by periods of uncertainty.
We must be careful about using only these datapoints to “look into” the future, but we can learn a few things. The most important is that rarely have we remained in a constant state of growth or decline. Certainly, over the past 10 years, equity investors have been rewarded. However, it has not been constant. In 2018, equity investors had a negative year.2
What does all this mean? 2022 is going to have its own unique risks and events. The risks in 2022 may not be repeats of previous years (even though some risks haver persisted for some time). Our environment is dynamic. To add some spice to the risks that have persisted, we have unique geopolitical risks based on current leaders. We have inflation we have not seen in many years. We have supply chain problems that have persisted since last year. To add to that, 2022 is a mid-term election year and one that is likely to contain Fed rate hikes. This means that volatility is likely to be higher and more frequent in 2022 than it was in 2021.3
Is this unusual? I am always a bit cautious of language that proports that “this time is different” because those are often gambles. Effective risk management avoids gambling, but takes risks that can be quantified. That is the difference between active risk management and speculation. We do have uncertainty and risks of all asset classes tends to rise in these environments which means we will likely have to remain calm and patient at times.
Well defined strategies can help us psychologically get through these environments because they adapt to the environment to manage risk without emotional inputs. This does not mean they will always be right, but it ensures that over time, investors can remain in a position to optimize their potential to meet their financial goals and obligations.
Even though history does not repeat itself, it can certainly look similar. In 2015 the Fed began hiking rates after a prolonged 0 percent rate. (Below is a chart of the S&P 500 in that environment.) It was certainly choppy! However, it set up new opportunities and growth for 2017.
We look forward to discovering what 2022 may hold for us as we navigate the environment together. Although we face several risks, there will likely also be opportunities along the way. Remaining flexible and able to adapt is exactly why we lay out long-term goals and use strategies that have been tested. Planning throughout all market environments with regular reviews can effectively help in uncertain times.
Chart Sources: Ned Davis Research
Source
- 1. IXIC: 13,964.21 -189.81 (-1.34%) (cnbc.com) According to CNBC, the high of 16,212.23 on 11/22/21 was roughly 14% higher than 1/21/22 (date content was written).
- Yield curve data Daily Treasury Par Yield Curve Rates shows the 10-2 yields have been decreasing. January 1/4/2021 the 10-2 was 82 basis and on 1/20/2022 it was lower at 75 basis points.
- According to CNBC as of 1/21/2022, the Dow Jones is down just under 5%, S&P500 is down between 6-7% and the NASDAQ is down over 10% YTD.
2 & 3: Chart – S&P 500 Index vs. Fed Policy Rates
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Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. Trek 236
