By James H. Dryden | April 2022
After stocks started the year with a troubling, double-barreled decline – first from fears over rising interest rates, then over Russia’s tragic invasion of Ukraine and the resulting commodity/energy crisis – the S&P 500 seemed to find its footing and nearly erased its year-to-date losses in March, gaining 9% between the March 8 bottom and the end of the month1. And now here we sit once again, a mere 6% below January’s all-time highs and fairly asking ourselves whether last month’s bounce was the start of a new leg up in stocks or simply a relief rally in the midst of a bear market.
Before answering that question we should acknowledge that we consider it nearly impossible to call the next few percent up or down in the financial markets so we’d be wrong to pretend to have those answers now. But sticking with what we can see and what we know, we may be able to piece together a reasonable idea. And on that, we believe significant headwinds persist:
We find ourselves in the midst of the highest levels of inflation we’ve seen in 40 years, created primarily by an expansion of the money supply well beyond anything reasonably necessary. The long-term erosive impact of inflation simply cannot be understated.
We find ourselves also in the very early stages of a Fed tightening cycle, with the expectation for upwards of eight rate hikes in 20222. Fed rate hikes, in and of themselves, don’t necessarily translate into bear markets, but they have historically led to elevated levels of volatility and anxiety.
We find ourselves amidst increased chatter of recession or stagflation, whether one is reading yield curves or tea leaves. Certainly neither scenario is particularly supportive of higher valuations.
We also find ourselves in the midst of continuing atrocities in Ukraine, bearing distant witness to horrific war crimes and acknowledging that the chances of a near-term truce have slipped significantly, and that shortages of agricultural and energy products may persist for months.
In short, we see the recipe for continued financial market volatility ahead.
But it should be noted that today’s environment is certainly not 2001’s or 2008’s – we don’t see structural deficiencies in the economy. On the contrary, the consumer is as healthy as any time in the last 40 years. Unemployment is falling. Corporate share buybacks have started the year at the highest-ever level3, a sign of corporate optimism.
Yet as long as the headwinds grab the headlines, the “risk-off” mentality is likely to persist.
We should be reminded however that we’ve been here before, as much as we’re all saying how different everything today feels. Remember the stock market crash of October 1987, the largest single-day percentage decline in history? Remember how the Bear Stearns and Lehman Brothers bankruptcies in September 2008 ushered in the Great Recession that saw the major equity indices decline by 50%4 ? Remember how the world shut down in February 2020 from the Pandemic and we watched dumbfounded as stocks lost more than a third of their value in just five weeks5? Each of these events were, in their own way, heralded as The End of the World, yet they weren’t. The markets recovered, companies innovated and grew their earnings, economies healed, and we moved on.
We ask whether today’s confluence of issues is different this time and honestly we won’t know until it’s behind us. Yet if we use history as a guide and look forward with a little confidence, we’ll wager that we’ll figure it all out, regroup and move onto new highs simply because we always have.
We also remind our clients that current events should never be the drivers of our investment policies because, at the end of the day, they are wholly irrelevant. True drivers of investment policy should always be our investment plans, our cash flow needs, our family legacy and succession interests…but never the daily headlines, as unnerving as they may be.
1 Schwab Capital Markets
2 Deutsche Bank
3 Birinyi Associates
5 Washington Post
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. Past performance is no guarantee of future results.