Market Commentary (Q1 - 2022)
Updated: Apr 5
We expected the capital markets this quarter to be active and they did not disappoint. Just a short time ago (March 14) the broad US market was down over 15% from its all time high (ATH) and the NASDAQ (home to some of the market's largest and most influential companies from a market weighting perspective) was down over 28% from its ATH in bear market territory. Since then, we had a considerable bounceback (see graphic below). The S&P 500 (the best measure of the US market) rallied by 11.1% in a recent 15 day period and illustrates why it would have been imprudent to sell after fear gauges spiked and selling intensified. Let us note, to recover and breakeven after a 15% decline, it requires a 17.6% recovery.
Usually the bond market provides an offset to the equity side of the portfolio, although this quarter broke from that familiar pattern. We still believe the fixed income side of the portfolio is important and should not be discarded. We have too many historical data points to take the other side of that argument or to change our view based on the price movements of a single quarter. That being said, the beginning to this year has been one of the worst starts to the year the fixed income market has seen in a long time. This "safe" side of the portfolio which often offsets losses on stocks when stocks lose has itself been down (see graphic below) and it actually down more than the equity side of the portfolio. Interest paid on the bonds will offset some of the losses in the bond portfolio. The 20 year US Treasury ($TLT) is down 8.3% year to date (it was down 20.6% from its 52 week high) and Bloomberg US Aggregate ($AGG), which is a good proxy for a diversified bond portfolio held by many investors, is down 5.3% YTD (was down 10.1% from its 52 week high).
That being said, one of the most important parts of success in a goal based financial plan is maintaining the appropriate exposures to various asset classes and strategies (which has been thoughtfully considered and designed for each client) and not making decisions based on the day to day noise (i.e. myopia: tendency to have nearsightedness when it comes to investing).
Prospectively, our view looking ahead can be broken down into the intermediate term (i.e Q2--the next 3 months) and the trend (beyond 3 months). For Q2 (i.e. the intermediate term), we can expect decelerating economic growth and decelerating corporate earnings which usually is a challenging environment for equities, especially growth stocks (high P/Es). We find that the rates of change in the growth of the economy, corporate earnings, inflation and interest rates matter more than the absolute levels. Government spending will decrease by $1.3 trillion which is equivalent to 6% of US GDP. As far as year end targets go (which is notoriously a difficult exercise), it's reasonable to expect markets to operate within trading range and they could even end the year higher than they began. As with any forecast, there are risks, such as the price of energy which is contingent both on government policy, supply side factors and the war against Ukraine. Our economy's energy intensity (i.e. units of energy per unit of GDP) is less than it used to be but the price of oil is a key risk factor to the economy and thus the markets.
The map indicates where we end up (e.g. year end and beyond). However, the terrain (e.g. the next 9 months) is how we get there. Most people get tripped up on the terrain (which by default is "noisy" and as most of the individual noises are not indicative of the map) and an area where we want to help.
We wish everyone a happy April out there. Please let us know if you have any questions.
Joshua Henry is the founder and Managing Principal of Meridian Financial Advisory, an independent, fee-based wealth management company located in South Carolina, serving people locally and across the country. Meridian focuses on providing wealth management solutions to affluent individuals over age 50 and their families. Joshua is passionate about helping people have a better life by designing and implementing customized financial plans that bring clarity and confidence. Joshua is a CERTIFIED FINANCIAL PLANNER™(CFP®) and earned a Bachelor of Arts degree in Political Science from Cedarville University and a Master of Business Administration degree with a concentration in Corporate Finance from Salve Regina University. The courses for the Corporate Finance concentration were taken from the Kelley School of Business at Indiana University. He has held workshops on Social Security Claiming Strategies, IRA Planning, and Career Coaching for Executives in between jobs. Josh has also taught finance at the university level. When he’s not working, Josh teaches adult Sunday School at his church in Pawley Island, SC. He enjoys traveling, reading, and time with his family. To learn more about Josh, connect with him on LinkedIn.