It’s hard to believe that we’re three quarters of the way through 2022 already! However, if you diligently watched the stock market last month, you may instead feel this has been a very slow and painful year. The 2022 market has not been for the faint of heart!
We had a brief mid-June to mid-August summer rally, with the Standard & Poor’s 500 Index (500 leading publicly traded companies listed on U.S. stock exchanges) posting gains of 17%. However, like a dream we can’t fully recollect, September wiped away those happy memories, closing the S&P 500 down 25% year-to-date. Markets gave back everything they gained since June, establishing new lows for 2022.
The Wilshire 5000 Total Market Index, the broadest measure of U.S. stocks, was down 26% as of the end of the third quarter. The widely quoted Dow Jones Industrial Average, an index of 30 prominent companies on the New York Stock Exchange, was down 21% over the same period. The tech-heavy Nasdaq Composite was down 33%, reflecting how the pendulum can swing harder in some concentrated market sectors. The Russell 2000 Small-Cap Index was similarly down 25% for the year.
International markets experienced an equally rough year. The broad-based EAFE Index, which measures developed markets outside of the U.S. and Canada, lost 10% in the third quarter, recording losses year-to-date (YTD) of 29% so far. With geopolitical issues and inflation risk abroad, the remainder of 2022 for international markets remains unstable and difficult to predict. Emerging Markets, as measured by the EAFE EM Index, also declined, and is down 29% YTD.
The U.S. REIT Index, which measures domestic real estate, posted losses of 30% since the beginning of the year. Only the commodities index posted gains with the S&P GSCI Index recording losses of 14% in Q3, but still netting a gain of 8% in 2022, so far.[i]
The Federal Reserve is set on combatting inflation through interest rate increases. To date, the Fed has raised the Fed Funds rate 0.25% (or 25 basis points) in March, 0.50% (or 50 basis points) in May, and 0.75% (or 75 basis points) in each, June, July and September of this year. That is a total of 12 quarter-point increases in a single year![ii] As a result of Fed policy, bond market yields are rising, but the yield-curve is still inverted, which is traditionally an ominous sign that a recession might be looming. Short-term Treasuries are paying 3.42% on 3-month, 3.98% on 6-month, and 4.0% on 12-month securities. Longer duration securities are paying 3.84% on 5-year, 3.63% on 10-year, and 3.68% on 30-year Treasuries.[iii]
Although we hoped June was the bottom of the 2022 bear market, September proved we’re not out of the woods yet. The 2020 COVID market decline was unprecedented with a steep market downturn, and the swiftest market recovery in history. It was a heart-pounding exhilarating roller coaster. However, some might argue that our 2022 market decline is harder to endure, like slow torture. Each time we think we’ve turned the corner, we suffer another stock market set-back.
Analysts have varying reasons daily as to why the market sell-off is continuing from continued inflation, record low-unemployment, and the strong dollar, which hurts exports. Short-term pessimism is contagious and headline grabbing. However, for the long-term investor, history suggests that the market is efficient, and market downturns present a buying opportunity. In other words, if you believe that inflation will return to reasonable levels, the Fed will eventually stop raising interest rates, and the economy will find equilibrium, you can make the most of this down market by sticking to your investment principles and rebalancing quarterly so you can buy stocks now, while the market is off from its highs. U.S. and global indexes are down about 25% year-to-date, yet it is hard to justify that all of the companies in the stock market are worth 25% less than they were a year-ago.
It is easy to recollect something was crystal clear in hindsight, but the truth is, the future is always a little cloudy. For example, consider the annual forecasts big brokerage houses make at the end of a given year. Published December 15, 2021, the J.P. Morgan 2022 Market Outlook predicted, “further equity market upside and above-potential growth.” Further, the global research division goes on to state they expect, “a strong cyclical recovery…within a backdrop of still-easy monetary policy.” Although most of the predictions were off, the latter statement couldn’t be more opposite of our current environment. Many brokerage houses were in the same boat with off predictions.
Psychology has proven that herd mentality can be powerful in moving us in one direction or another. When things are good, there is a strong tendency to buy equities, even at a market high. When things are poor, herd mentality can push us to panic even though we know in our gut, we’ll make it through this. In down markets like we are currently experiencing, paper losses are reversible unless you lock in those losses by selling, making losses permanent, and possibly missing out on the recovery around the corner. While active buying and selling often feels mentally rewarding in the short-term, studies have shown such actions often are at the detriment of long-term investment returns. While the sharp V-shaped recovery of 2020 was quick and resolute, our current 2022 slow decline requires patience and prudence to stick to a sound investment philosophy that can make it through both the good and the bad times.[iv]
Let’s all do our best to be grounded through the sensational news headlines. If you need a financial sounding board, reach out to a Certified Financial Planner™ or a CPA who can ensure you’re on track to capture the next market recovery.