A great debate is underway in the market, which is testing the resolve of investors. There is no doubt that markets have had a difficult beginning to 2022. With a third of the year behind us, equity markets are all down this year. However, it has not just been equity markets that have struggled. Nearly all asset classes have had a bad start to the year as expectations of slowing growth and inflation have starred as the economic worries of 2022.
Last Thursday the Bureau of Economic Analysis (BEA) released the first quarter estimate for Gross Domestic Product (GDP). It was the first negative GDP number since 2020 at a negative 1.4% annualized rate. According to the BEA, this is largely due to decrease in private inventory investment and a reduction of government defense spending. Underlying increases of personal consumption, nonresidential fixed investment, and residential investment all contribute to a likelihood that the decrease in GDP is not marking a beginning of a recession, but rather punctuating the economic slowdown in a year when global reserve banks are raising rates to combat stubbornly high inflation.
The bad start to 2022 is combined with headlines risks that include yield curve inversions, high energy prices, war in Ukraine, and now evidence of slowing growth with the first release of GDP numbers. The wall of worry is difficult to digest for many investors who have enjoyed the fantastic market returns from 2020 and 2021. It is important during difficult market times to remember that over-emphasizing the short-term losses and assuming that is going to continue forever is detrimental to long-term financial success.
Furthermore, according to Ned Davis Research, there is a big difference between a bear market and an echo-bear market. Bear markets tend to occur in concert with recessions, while echo-bear markets can happen absent a recession. However, it is encouraging to realize that even though echo-bears are not fun, they tend to be significantly shorter than a bear market. They are followed (not average) by post echo-bear markets, which enjoy similarly robust returns as post-bear markets, but last significantly longer.
Maintaining a big picture view is a challenge when bad news dominates and there seems to be more to worry about than to be hopeful for. That predicament is also nothing new and has been a source of many echo-bear markets. While unpleasant, it is a reality.
Current data does not yet support a view of an impending recession and therefore, until we have that data, benefit of the doubt should be given to the reality that this more likely an echo-bear market than a recession. Which is good news since they tend to be faster, less severe, and have great recoveries.
Remembering that we are in this for the long-term is helpful. Models, diversification, and rules-based trading can also be helpful, but the only thing that works all of the time is patience. It’s difficult to maintain, but it works. When an underlying strategy is sound, patience is the missing link between success and big mistakes. The data we cultivate over time is helpful to give us the willpower to maintain that critical discipline.
- BEA.gov, April 28, 2022. https://www.bea.gov/news/2022/gross-domestic-product-first-quarter-2022-advance-estimate.
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