This was the kind of quarter where we find out what kind of investors we really are. It’s the hypothetical scenario on every risk tolerance questionnaire. What would you do if the stock market dropped suddenly? If you didn’t know before, you know now. At one point in the quarter, the S&P 500 was down 13% from its high. At the same time, interest rates were rising, pushing bond prices down and virtually the entire portfolio was in the red. How did you feel? What did you do? From the safety of hypothetical market movements, everyone wants to think they are unshakable long term investors. When it comes to real dollars, though, we are susceptible to instinct and emotions that can trump sound decision-making. The start of 2022 has been a period where investors find out who they really are and if it matches up with who they think they are.
It’s important to remember that in an average calendar year, the S&P 500 experiences a 14% drawdown. From January 4th through March 8th, the index fell 13%. Let’s hope the market is just getting this year’s shakeout done early. The S&P 500 rebounded 11% to end the quarter down 4.6% – an unusual double digit correction followed by a double digit gain in the same quarter. Also unusual was the 6% loss suffered by the Bloomberg Barclays US Aggregate Bond Index, the largest quarterly loss in the index since the early 80s, as interest rates jumped.
Inflation is high at 7.9%, shifting from a data point to true wallet pain. The month of March is where economists predicted inflation to peak so no one should be surprised we’re feeling the squeeze. The other half of that prediction is that inflation reverses course significantly in the second half of the year. Unsnarling supply chains, increased leisure travel, and lower housing demand (due to higher mortgage rates) should help. No one anticipated war and the sanctioning of one of the world’s largest energy producers, though.
Bonds serve two roles in a portfolio: as diversification from volatile equity prices and to provide income. With rates declining in recent years, income became scarce. However as yields declined, bond prices went up. The Bloomberg Barclays Aggregate Bond Index gained 8.7% in 2019 and 7.5% in 2020, returns investors might expect from equities, not bonds. Rates have finally come unstuck from rock bottom, putting downward pressure on bond prices. This hurts today. However, bonds still mature at their face value, so some of the gains of the prior years were going to reverse eventually, as bonds approached their maturity dates. Also, as rates continue to rise, cash deployed to bonds is earning a more meaningful yield again, in addition to acting as ballast for a portfolio.
The movie Soylent Green was released in 1973. Societal tension, high prices, and supply chain issues set the scene for the distant future – the year 2022. I’d recommend watching it if you haven’t seen it, but that might violate our fiduciary promise. The film is slow and the payoff at the end – Charlton Heston’s “SOYLENT GREEN IS PEOPLE!” – is too little. Today’s headlines can make it feel like we’re living in the dystopian future. The more often we check our phones, the worse things feel.
Instead of speculating, we focus on reality. Markets are up more often than they are down. No one can predict when they will go down or when those downturns reverse. Markets are not mathematical equations. They are made up of irrational humans who don’t share the same goals. Market movements don’t always make sense. The S&P 500 is up 3.5% since Russia’s invasion of Ukraine. It’s up over 50% since the bottom of the pandemic despite supply chain problems, labor issues, and still-recovering leisure and travel sectors. These are not outcomes the experts expected at the time.
So do nothing?
No! Execute on your plan. Has your situation changed? Has your portfolio changed? Is there new cash coming in? Are there new cash flow needs? When was the last time you looked at your estate plan?
Focus on what you’re trying to do with your portfolio. There are plenty of folks in the media warning about the crisis of the day, but the greater risk is making unnecessary money moves. Market losses will be reported in Dow points, gains in percentage points. Product pushers crave investor activity, but trying to pick winners in the short term leads to long-term regret.