A compelling market update has to include at least three items: technical summary, market insights, and actionable advice. Ideally we like to keep a positive tone in our message, while being realistic with expectations, and pessimistic (or at least conservative) for portfolio and financial planning purposes.
This past quarter has tested our resolve for positivity, but has not changed our prognosis that equity markets remain a compelling place for investable dollars. The quarter also reinforces our philosophy that short term dislocations in the markets demonstrate the need for discipline and a longer term view when pursuing financial goals. The past two quarters illustrate this point nicely. The news headlines in the first quarter of 2022, as summarized by our Q1 update, brought war, significant inflation, and rising interest rates. Despite these negative factors, the broader market did not "price in" many of these changes until Q2.
As of 3/29/2022 (which is admittedly not the exact end of the first quarter, but it's close) the S&P 500 was down only about 3% on the year. The VIX Volatility Index had increased, but was well off its intra-quarter highs. Fast forward until the end of June, and we see the S&P down over 20% on the year and the Volatility Index up significantly. Unfortunately many of the headlines of Q1 persist, with no clear end in sight.
Another data point that made the past quarter particularly challenging, in the markets, was that long term U.S. treasuries were down nearly two-thirds as much as the S&P. Although hardly unprecedented, bond markets typically move in the opposite direction of equities. This is what makes them function as a "hedge" to the stock side of a portfolio. When a down market coincides with rising interest rates, however, that correlation does not hold true and we see stocks and bonds move in unison to the detriment of returns.
So we find ourselves in interesting times which make dispensing advice that much more fraught. The headlines always seem dire, but as the old saying goes, "it's always darkest before dawn." There is reason to believe that we are at or near a market bottom and could see a rebound in the second half. At the same time there are still many things looming that could prevent a recovery or cause further pull back for stocks.
Trying to predict the future is a fool's errand. Instead, during times of challenging markets, we fall back on our mantra of discipline. Do not deviate from long term allocations today. Watch for signs of optimism and tide changes. Rebalance when appropriate. For investors with a higher risk threshold, be open to conversations about small tactical shifts to opportunistic investments. As always, if you have additional questions or concerns, reach out to your financial advisor for a conversation about your particular situation.
-Open Door Financial