The economy and markets took a hit during the first quarter of 2022. The Russian war against Ukraine is a significant event that has worsened the shortages and inflation pressures already felt as a result of the COVID-19 pandemic. We don’t know how Ukraine will turn out, but we do know that stocks have weathered many, many crises, including WWII, the Cuban missile crisis, the Persian Gulf War and 9/11.
We are currently in an extraordinary period of investment history. 2021 brought a lot of change, and 2022 promises to keep things “interesting” as well. The S&P 500 index has now doubled since New Year’s 2018, and it is challenging to find a period that even comes close to matching the recent three year run of 28.88% (2019), 16.26% (2020), and 26.89% (2021) returns that investors have enjoyed during this remarkable stretch.
In recent years it’s been easy to forget about the risk side of the investment equation. Based on recent history, we’ve come to expect long term, stable growth, and we fear any loss of those gains. For the first quarter in a long time, diversified investors saw a decline in value on their investment statements. While the declines during the quarter were not particularly severe by historical standards, temporary losses serve as a discomforting reminder of what it means to be an investor.
The most important thing you can do today is to be patient and avoid emotional decision-making. Market risk can be greatly reduced with time, and sound financial planning takes this into account. The reduction of risk over time is a key, proven principle that we employ here at Harvest Asset Group as we help clients fund personal goals and support financial security.
Today’s Economic Perspective
Economic data suggests the US economy is continuing to show strength. We entered March with substantial momentum – with leading economic indicators pointing to strong growth this year, strong jobs and income growth, record household net worth, booming home construction, and car manufacturing coming back.
However, the Russian war against Ukraine has worsened the shortages and inflation pressures already felt as a result of the COVID-19 pandemic. The Federal Reserve and other central banks have no choice but to transition from supporting economic growth with extremely expansive monetary policies to fighting inflation with higher interest rates and quantitative tightening.
These two factors (strong economy and supply chain shortages) can be expected to drive inflation further. Economists’ projections seem to be in the 5% range for inflation in 2022.
Fear of a potential recession is starting to brew in some circles, but there is no evidence in key economic data that suggest we are experiencing a recession at this time. That said, according to a recent survey of economists, most were backing off the robust growth projections that they were making late last year. Consensus among economists today is that the economy will produce growth of about 1.8% – far below the 3.9% projection in the previous survey. The new forecast probably reflects the fact that there was zero GDP growth in both December and January.
Economic conditions in the US and globally are evolving quickly. The odds of a recession can climb as global interest rates, adjusted for inflation, rise and the financial positions of households and businesses deteriorate.
Today’s Market Perspective
Despite a rally that began in mid-March, stocks (particularly growth and small-cap issues) finished the quarter in negative territory. Just about every investment declined in value. The Wilshire 5000 total market index (the broadest measure of U.S. stocks) lost 6.18% since January 1st. The only major asset class that produced positive returns was commodities, which were up significantly driven by current economic conditions.
The first two months of the year saw the S&P 500 index drop from 4770 down to 4173, more than meeting the technical definition of a market correction (a decline of >10%). Then, in the second half of March the index made up a lot of ground to reach back up to the 4630 level. If you only looked at the markets at the end of December, and then again on April 1st, a graphic depiction of the downturn for the quarter would have looked like an insignificant blip in a generally positive 13 year upturn.
That said, there are enough clouds on the horizon to raise the possibility that we’ll have to endure further declines before the market again touches new highs. The obvious one is the uncertainty that comes with a continuing grinding war in Ukraine, and the sanctions and oil/grain supply disruptions associated with it.
More optimistically, it is not easy to ignore the fact that the U.S. economy added 431,000 new jobs in March, after a gain of 678,000 in February. Oil prices once again fell below $100 a barrel despite all the dire predictions of global shortages, and U.S. based corporations experienced their most profitable year since 1950 in calendar 2021.
People who see the glass half empty certainly have some data on their side, but so to do the optimists. What’s interesting is that this has always been true. Fact is, right now is an especially difficult time for economists and market analysts to predict future outcomes with any degree of confidence.
Final Thoughts
Given the war and rising inflation, it’s actually surprising that markets have been as steady as they have been. The reason for this can likely be linked to corporate earnings. Earnings and stock prices are highly correlated, and corporate earnings estimates have been rising not falling.
If the markets continue their choppy course, you will see a lot of pundits, soothsayers, and (even less reliable) market economists telling us with confidence what’s going to happen next. Some of them, by the law of averages, will be right, and will trade on that credibility through several false predictions to come.
Enduring instability in equities (like that of the last quarter) is the price we pay for enjoying returns that, over long-time horizons, are likely to be substantially higher than those for cash or bonds. Part of our mission is to help make sure you don’t turn a temporary paper loss into a permanent loss.
The proactive approach to market volatility employed by Harvest Asset Group, which typically isolates a number of years of anticipated needs in safe reserves, means that short-term goals can be funded without having to sell assets currently under pressure. This can help ease the emotional and practical difficulties of sticking to your investment strategy during periods of distress
