By Jacobson Truex, CFP
The financial markets hate uncertainty. After record returns for the 18 months prior, the past six months in the markets have been tumultuous. Market declines briefly dipped the S&P 500 index into bear market territory on May 20 for the first time since March 2020. Despite the sharp fall, exacerbated by challenged market liquidity, I expect resilient fundamentals to keep recession risk relatively anchored in the near term. Consequently, I believe the opportunity cost of exiting the market may be greater than the risk of a deeper drawdown from current levels.
These precipitous drops were caused by multiple variables compounding against each other to create a perfect storm. The markets began reacting negatively in late November when the Omicron variant gave us more fear of restrictions. After a volatile December and a small Santa rally, January was dominated by worse than expected inflation numbers and rising interest rates as a response. We also started to feel the supply chain crisis that resulted from global lockdowns. The confluence of higher inflation, higher interest rates, supply chain shocks and mixed earnings reports resulted in elevated volatility and uncertainty.
That heightened volatility marched on beat with Russian troops making their way through Ukraine. While geopolitical actions historically have had short-lasting impacts on the U.S. markets, war exacerbated supply chain issues, commodity prices and uncertainty. In credit to the Ukrainian resilience, the war has lasted much longer than expected and continues to weigh on the market outlook.
While everyone has been trying to digest supply chains, earnings and war in eastern Europe, inflation has yet to cool. There have been some signs the worst may be behind us, but the end is not in sight. In the 80s, Fed Chairman Paul Volcker effectively created two recessions to curb inflation. Uncertainty regarding the Federal Reserve’s ability to “softly land” inflation to normal levels is my biggest concern facing the markets. Volatility should remain elevated over the next couple of months as the markets try to dissect all news with tightened liquidity in the markets.
I remain bullish for the second half of 2022. Fundamentals are strong in many areas of the economy and financial markets while company valuations have dropped below historical averages. Warren Buffett famously said in his Berkshire Hathaway Chairman’s Letter in 1986, “Be fearful when others are greedy, and greedy when others are fearful.” In a year dominated by negative headlines, I am urging all clients to be disciplined and patient in the face of uncertainty. For those who can afford to invest more, now may be prudent. For our clients worried about the recent volatility, dollar cost averaging is a way to reduce the impact of volatility on an investment.
As one is weighing their investment situation, I encourage clients to ask themselves three questions: 1) Is this current market situation transitory? 2) Are you well-diversified? 3) Do you have any short-term liquidity needs? The answer to the first question is always yes. As for the second question, we encourage our clients to be well-diversified, but some rebalancing may be prudent. As for short-term needs, one should carefully consider when and what to trim. I recommend consulting a professional for advice. If you are lucky enough to have excess cash, it could make sense to invest it while markets are depressed.
I understand how difficult it can be to stay invested or invest more during periods of uncertainty. However, as Buffett reminded us in his October 2008 op-ed: “What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”
The writer joined McLaughlin Ryder Investments in January 2020 following five years of professional experience focused on financial management and business consulting. He currently holds his Series 7, 63, and 65 licenses and is a certified financial planner professional.