February 2022 – Expect The Wild Ride to Continue
January’s stock market action felt a little too much like Mr. Toad’s Wild Ride. Investors endured head spinning volatility at times, particularly towards the end of the month. From Monday January 24th through Friday January 28th the S&P increased or fell by over 100 points, within 24 hours, seven times. Some of those fluctuations were closer to 200 points. The technology heavy Nasdaq index was down five straight weeks (16% from its highs) which is its longest losing streak since 2012. Small caps were down a jaw dropping 22% off their highs and have closed in a technical bear market. If you read last month’s blog So Goes January, So Goes the Year? you are wondering if markets have priced in the bottom or if more losses are on the horizon.
I would like to start off by saying that market pullbacks and corrections (while painful in the short term) are necessary parts of normal market cycles. In a normal market environment, we can expect the S&P 500 to decline 5% or more about three times a year. 10% corrections occur about every 16 months. The last major pullback for the S&P 500 was in September 2021 when it slumped 5.2% before rocketing back to close out the year. Investors are asking if we have reached the bottom of the current sell off, or if there is more downside pressure looming.
As usual the consensus is a mixture of good and bad news. The market most recently began trading in a very tight range between previous bottoms and the tops of recent bounces. The good news is that buy signals are in place, and support levels are holding. The not-so-good news is that a violation of current support could certainly lead to a deeper decline. Fourth-quarter GDP rose 6.9%, well above expectations of 5.5%. The gains were driven by a pickup in consumer spending and a surge in inventories as rising inventories contributed 4.9% of the 6.9%. The sharp rise in inventories is a good sign that some of the supply shortages are going away, but this growth will be hard to sustain moving forward. The biggest wildcard seems to be exactly how the Federal Reserve will continue to respond to inflation. It has already been decided to raise rates beginning this quarter as well as to aggressively taper off their bond repurchases. The decision rattled markets who were accustomed to the low-rate environment however it was certainly not a surprise move. My guess is if the above interventions have the desired impact on inflation, investors will be willing to move past the rate hikes, but we will need to wait and see.
What does this all mean? Investors should continue to closely monitor their positions and risk tolerance. If you were uncomfortable during the past month, you may want to use any upcoming rallies to reduce some of your equity exposure as it’s possible to see extended volatility. Most importantly, make sure your portfolio allocations have specific roles and that they are achieving them. Some equity funds are more volatile by nature than others so be clear about their purpose. Not all bond funds are the same so if you are looking for better principal protection you will have a good idea how they are performing in this current environment. As always, we are here to answer any questions you may have. We are happy to help. Stay warm and stay safe! See you in March!
Ashley Rosser, President
Prior to her career in the financial services industry, Ashley earned her Bachelor of Science in Nursing from Cedarville University.
Ashley decided to make a career change from her ten years within the healthcare industry as a pediatric emergency room nurse to retirement and 401K investment planning. She joined Victory Fiduciary Consulting in 2008 after obtaining her Series 65 professional financial license and went on to earn her AIF (Accredited Investment Fiduciary) professional designation from the Center for Fiduciary Studies.