Welcome back to Normalcy!
Given the market’s weakness since the beginning of the year, we wanted to check in with you to share a few important thoughts. Mostly that our theory of a “bumpier” market in 2022 appears to have caught on with many other investors as all major indexes are firmly in “normal correction” territory as of this morning.
What is a normal correction?
As we shared in recent Strategy Updates, investors have been spoiled by a two-year period of low volatility, paired with higher-than-normal equity returns. In fact, the last time major market indexes declined by 10% and the Nasdaq by even more, was pre-election 2020! This long period of sanguine market movement has lulled investors into a comfort level that just isn’t realistic. A normal correction in a bull market lies somewhere between 10-15% for major indexes and further for very volatile Nasdaq stocks. At this point, the MSCI Global Stock and S&P 500 Indexes have reached the middle of this range. In addition, normal corrections are usually longer in duration, lasting 6-8 weeks. This market pullback has occurred swiftly, which can make it feel worse than "normal!" The good news is that, according to our analysis, this correction has almost reached the exhaustion stage. Data points such as investor psychology polls, the very significant declines in the market’s highest fliers, along with our trusty oversold indicators all point to a correction that is reaching its extreme.
How often do normal corrections occur?
If you watch the market often, you might be thinking, "How often do I have to experience these periods of manic selling and the media attention and drama that goes with it?" Well, more often than you have in recent years. Historically, these normal corrections usually occur three to four times a year with each followed by a rise to new highs in the global markets. It is these market corrections and the fear of the unknown that makes investing a challenging craft and not suited for the faint of heart.
You may have noticed that we did some selling at the beginning of this year. This was timely as it provides us with more money market funds than normal and the opportunity to “scoop up” some bargains for you that have been created by this - so far - normal correction. We will be careful about where and when we buy additional stock and, needless to say, we will be focusing on high-quality, very profitable companies both here and abroad.
Looking Ahead
The Federal Reserve convenes Wednesday, and we will be listening carefully to their comments. Given current inflation, a hint towards raising interest rates seems highly likely and may be the very reason stocks have been correcting over the past few weeks. Barring any surprises on Wednesday, we remain optimistic about financial markets for 2022 and our “Bumpier but Bullish” theme. The recent and normal decline in stock prices provides further support for a good year ahead from these levels.
One never knows when a normal correction can turn into something worse so we will tread carefully and continue to employ our Active Risk Management process – which is the unique combination of being flexible about your exposure to stocks, emphasizing healthy sectors of the market, and employing carefully placed stop-loss orders – to ward off catastrophic loss, not necessarily normal corrections. To add, market volatility is an integral assumption to one’s overall wealth plan.
We hope you find this brief market update helpful!
If you have experienced any significant changes in your finances or have any questions feel free to let us know.
From all of us on the team, we thank you for your vote of confidence in our work!