May 17, 2022 Market Commentary

Are we having fun yet?
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It is still hard for me to fathom that my high school years were over forty years ago.  Back in the day, mainly because of my size versus my talent, I was quite the athlete.  I will spare you my Al Bundy stories of gridiron glory, but I want to tell you about two-a-day practices.  Typically, for a few weeks during the hottest weeks in August, the football team would hold summer camp.  It was similar to Steelers camp, although shorter and without St. Vincent College and the media.  During one of those weeks, we always had two-a-day practices.  We would work out from 9:00 to 11:00 and then come back in the heat of the day for a second practice from 2:00 to 4:00.  By the end of the second practice, even young, fit teenagers were dropping from exhaustion and dehydration.  At about the point of maximum pain, our coach would walk around with a bullhorn yelling, “Are we having fun yet?”  As forty-plus years have sailed by, I always remember that phrase in any time of pain, whether physical pain, mental pain, financial pain, etc.  When life seems unbearable, I ask myself, am I having fun yet?  Then I try to hang on just a little while longer.

The start to 2022 has not been fun.  Coming after a great 2021, which saw double-digit returns for most stock markets, one might have anticipated a pause or slowdown in 2022.  However, the combination of war in Ukraine, lingering Covid shutdowns (primarily in China), high inflation, labor shortages and nagging supply chain issues have led to conditions much worse than a pause.  April was a bad month and May has accelerated the pain.   Through 5/13, the S&P 500 Index (large US stocks) is down -15.6%, the NASDAQ Index (growth stocks) is down -24.5%, the Russell 2000 Index (small US stocks) is down -19.4%, and the MSCI ACWI Index (international stocks) is down -16.6%.  If that wasn’t bad enough, fixed income, a historically safer asset category, is facing a Fed rate tightening cycle to battle inflation.  The Bloomberg U.S. Aggregate Bond Index, a proxy for the bond market, is off to its worst start in over a hundred years and is down -8.0%.  Are we having fun yet?

When will this stop?  That is the question everyone would like answered.  As we’ve been discussing internally at our weekly Investment Policy Committee meeting, it feels like this will be a prolonged correction.  That doesn’t mean it needs to go much lower, as we have already felt a lot of pain.  It just means that unlike the recent market corrections, the market doesn’t seem poised to bounce back quickly this year.  Life and investments currently face a lot of uncertainty and one thing I have learned is that the financial markets do not like uncertainty.  They react to uncertainty like they are behaving now, repricing investments according to worst case scenarios, certainly not valuing the world through the rose-colored glasses of the good ole days of years past.  So, what to do differently if anything?

The main thing not to do is panic.  Selling out of investments locks in losses and doesn’t give portfolios the chance to recover.  As an example, let’s look at the bond market.  Investors have felt a great deal of pain with poor bond returns in the first half of this year.  However, this may help bonds play the role they are designed to play in the second half of the year.  Many pundits have articulated that the Fed is behind the curve in fighting inflation, but the bond market is not.  Interest rate have gone up across the yield curve in anticipation of future Fed rate hikes.  Eventually we will benefit from holding a less volatile asset category that pays a nice yield.  This is something we haven’t been able to get for years.

RELATED: Read these tips to protect your money from inflation.

In equities, the worst of the pain has been felt by growth stocks declining at a furious pace.  Meanwhile, market leadership has rotated into value stocks, which have fallen at a much slower pace.  We prefer to maintain a balance between growth and value in our accounts and have been able to reduce some of the pain by not having an over-weighted exposure to growth stocks.  The same type of balance exists among our allocations between large-cap, mid-cap, small-cap, and international stocks.  Depending on portfolio objectives, exposure to alternative asset categories like real estate, arbitrage, and infrastructure may be added to the mix.  Trying to time the financial markets, making extreme moves in and out of longer-term assets, has proven to be an unsuccessful strategy.  Although we are not bullish, things could get better faster than we think, just as things got bad faster than we thought they would just four short months ago.

I’m not sure when this correction will end, but it seems like it will be a long summer of high volatility as the market seeks a new level of relative valuation.  As stocks and bonds adjust to a changing world and changing valuation expectations, we must adjust too.  We have purposely rebalanced accounts less frequently thus far in 2022.  We find it difficult to make asset allocation decisions when both stocks and bonds are falling at a similar pace.  The good news is (yes there is some good news), employment is at all-time lows and consumer demand remains very strong (if consumers can find and afford what they want to buy).  Overall, company earnings have held up and forward guidance continues to offer hope.  As the markets digest these earnings and readjust valuations, we could certainly see some very good bouts of performance.  Some anecdotal evidence that makes me feel like we might be getting close to a bottom is listening to all the experts on cable tell me that we are nowhere near a bottom.  No one knows for sure if over the next three months the markets will be up, down, or both.  We are confident that over an extended period of time the financial markets are the only place to get returns that will exceed inflation and provide for a lengthy retirement stream of income.  As always, talk to your consultant about any changes in your investment outlook.

Until the markets stabilize and begin to recover, “are we having fun yet?”

If you have questions about this information or your overall financial plan, call us today at 412-630-6000. Our experienced financial advisors are here to help.

All data from The Wall Street Journal 5/14-15 Weekend Edition

Contact Michael K. Kauffelt, II, CFA

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