Investors have been on quite the wild ride so far in 2022. After an optimistic first trading day of the year which saw the S&P 500 hitting a new all-time high (following 70 new all-time highs in 2021), U.S. markets are down ~ 10% for the year – one of the fastest corrections ever:
What’s driving this? Well, here’s a small sample from the Bad News Headline Buffet: the threat of Russia invading Ukraine, a new “stealth” sub-variant of Omicron, an overwhelmed healthcare system, The Fed is turning off the proverbial economic faucet (which isn’t actually the bad news many claim it to be) and it’s likely that we’ll see rate hikes soon (also not bad news), and inflation is running rampant which means everything costs more. That is assuming you can actually find what you need due to ongoing supply chain issues driven in part by ongoing labor shortages because workers continue to quit in droves and/or be sidelined by Covid. Oh – and for you Brady fans out there, despite an extraordinary effort in the Bucs’ playoff game against the Rams, Tom Terrific failed to make it to another Super Bowl.
It’s a doom and gloom bombogenesis wrapped in a cloud of extra pessimism which is enough to make even the most optimistic Susie Sunshine curl up in a ball and hide under the covers to wait out the storm. However, even though the news is bad, and the market volatility is unsettling, we wanted to remind you of a few important things:
1. Volatility is Normal
It can be easy to forget that volatility is normal after long periods of relative calm but it’s the long periods of relative calm that are actually unusual. On average, markets generally experience three 5% pullbacks and one 10% correction per year. However, we only saw 1 pullback in 2021 and we haven’t seen a 10% correction since the last wild ride back in March 2020. The last 20 months might have been blissfully calm for investors – but they weren’t “normal.”
Remember: volatility is the price you pay for being in the stock market. If stocks went up and up and up without any risk, then investors wouldn’t be rewarded for putting their money in the market.
2. Markets Do Well After Corrections
A few months ago, investors were concerned that markets were going to plummet from their all-time highs. Now that concern feels very real given how fast the market is dropping, and investors are wondering how low we might go. As a reminder, markets tend to perform similarly, whether it’s after a new high, or after a correction:
And in fact, after most corrections, 1- and 2-year returns are largely positive:
3. Remember the Race You’re Running
Usain Bolt and Eliud Kipchoge are both celebrated runners. They’ve both won Olympic gold medals. They both hold world records. And they are both considered to be the best in their fields. So, who’s the better runner? Well, it depends. What’s the race?
Usain Bolt is a sprinter, best known for running the 100m in under 10 seconds while Eliud Kipchoge is the first person to run a sub-two-hour marathon. Both men are runners and both men are exceptional athletes. But that’s where the similarities end. Sprinters and marathoners train differently, have different body types, and they rely on different skills and physical attributes to drive success. Trying to compare them is like trying to play pickleball on a tennis court – or designing a long-term investment strategy according to daily headlines.
Millions of people buy and sell stocks every day, but they aren’t all doing it for the same reasons. There’s a big difference between a day-trader looking to turn a quick profit before 10am each day and a long-term investor looking to build wealth over a 30- or 40-year horizon. The problem is – even though investing is about what happens over time, the day to day is what’s reported by the financial media. So, while investors are playing the long game, the financial media is calling the short game and it’s incongruous.
Always remember what race you’re running, and don’t let noise about someone else’s race distract you from your finish line.
We think about investing as a numbers-based field – something that can be quantified in a spreadsheet and measured against an index benchmark. But investments are made by people, and people are complex. We’re messy – full of thoughts, feelings, emotions, biases, and a lifetime of experiences that shape how we look at the world and drive the decisions we make which is why our success with money is less about what we know, and more about how we behave.
Or as Jason Zweig recently wrote “It isn’t investments that get tested in turbulent markets; it’s investors.”1
1 “Why You Should Sit Out the Mayhem” by Jason Zweig, The Wall Street Journal, January 25th, 2022
The information in this article should not be considered investment advice to you, nor an offer to buy or sell any securities or financial instruments. The services, or investment strategies mentioned above may not be available to, or suitable, for you. Consult a financial advisor or tax professional before implementing any investment, tax or other strategy mentioned herein. The information herein is believed accurate as of the time it is presented, and it may become inaccurate or outdated with the passage of time. Past performance does not guarantee future performance. All investments may lose money.