Like most years for investors, 2022 has been an eventful one. As the world continued to reopen, surging demand and supply bottlenecks have caused inflation to rise. After two years of stimulus, the Fed raised interest rates, with the potential for more hikes to come.
As if all of this wasn’t enough, Russia, after years of saber-rattling, launched a full-scale invasion of Ukraine in February.1 Our primary concern is for the people involved. There has been needless suffering and loss of life, and our thoughts continue to be with those affected.
Of course, investment markets have not taken these developments well. Most major world markets have moved down. U.S. equity indices, as well as international markets, have recently fallen into correction territory. That is a decline from the highs of 10% or more.2 Often, when uncertainty causes markets to fall, bonds rise in a “flight to safety” trade. Given the prospect of higher interest rates, even bonds are down for 2022.3
Looking forward and looking back
It can seem overwhelming with so many issues affecting the markets at once. Amid the headlines, important things can sometimes be overlooked. We prefer to look at the totality of circumstances for perspective. Financial markets celebrated an important anniversary on March 16th. It was just two years ago that the world was realizing that the troubling reports of a mysterious virus would become a global pandemic.
The S&P 500 dropped 12% in a single day as markets fell into disarray. By the end of the decline, it had fallen 34%.4 The pandemic decline and recovery were swift. As students of the markets, we know that all market declines are different. However, there are principles that still apply to help get through them.
Volatility is part of investing
There is no real way around it. In order to benefit from the strong return equity markets have historically provided, one must be willing to tolerate declines. The key is to be aware of risk in advance and build portfolios accordingly. Warren Buffett has called this process weathering market declines while attempting to avoid a permanent loss of capital.
Taking a longer-term view
This is a phrase that is thrown around a lot but is of course harder than it sounds. We try to further define it. Whenever clients are making a significant investment decision, we encourage them to ask, “How will I view this move not over the next five days but over the next five years?”. This can really help in making sound decisions that lead to better investment outcomes.
We are still in the middle of uncertainty and change just like we were two years ago. We made it through it then. The path and the timing will be different this time, but we can do it. As always, we are here to help.
Rick Shapiro, Keith Piscitello, and David Stachowiak
1CBS News, February 24, 2022
2 Standard and Poor’s, March 2020 and 2022
3 Barclays, YTD
4CNBC, March 16, 2022