AS OF LATE
For many investors, the news surrounding the month of February and the continued downturn which began in January is almost a bit of old news at this point. Since the very last week of February, the Russian invasion of Ukraine has dominated the news and cast a dark cloud over investment markets but it is very, very important to remember, the downturn is not directly related to the ugliness of War upon Ukraine by Russia has brought out. This downturn really had its beginnings in November. The December market had enough strength in the “Santa Claus Rally” to dissuade many of the technical factors we read that there was still more upside to come, though the upside might be muted.
First, we'll look at the February equity markets for the U.S. As you can see, somewhat across the board, markets here in the US for stocks were down between -4% to -5% for the month alone.
If we reach back and pick up the month of January and look at the year-to-date numbers, we see that the three indexes in the first graph are now showing they are down between -7.5% and -14% for the year.
In the January newsletter, we reviewed many different factors cauU.S.sing stress on U.S. markets. We mentioned, “there will be more downside coming in the future”. February and the downturn in stocks have clearly shown the downside for markets is in the cards and it is currently the belief here at Capital Research, more is still yet to come.
We do think it's important to note that up until the day of the invasion of the Country of Ukraine by Russia, there was a large set of beliefs that the invasion would not occur. Obviously, the invasion began in earnest on the 24th of February, but if we look at the numbers, the worst part of February market activity actually occurred prior to the invasion. Investors often like to play pin-the-tail-on-the-donkey and in this case, so many will refer back to the early part of 2022 and blame the downturn in markets on this unprovoked invasion. But that is not the case.
This downturn is rooted in economics and the latent attempts by the Federal Reserve here in the United States to now address things they should have addressed long ago and done so in a much more gradual and attentive manner.
But I'm not sure we should solely focus here on what others should be doing or have not done. We're probably best suited to address what we need to be doing, adjusting our view of where things are and where they are likely headed.
I think for many investors changing our outlook can be a little difficult. Realize that just 24 months ago markets went through a most violent and volatile month, the onset of the pandemic. Dropping 34% in 30 days did put shockwaves through many people’s thinking. Then, for the next 23 months, completely contrary to that massive and shocking drop in the markets, with a few bumps and bruises along the way, markets have largely risen.
Now, this thing called “2022” shows up and doesn't want to play nice for and with everyone any longer! For many investors, their first thought is, “Oh, what happened? What is wrong? I thought everybody was going along and getting along just fine!”
In various different political campaigns historically, it has been announced at different junctures that the focus should be on, “ It's the economy stupid!”. This is exactly where we are today. The reason we have pointed back to the Federal Reserve on this is that the Federal Reserve is trying to accept responsibility for the economy more today than they ever have before. And if someone steps up to take responsibility for something, oftentimes we let them. The thing as individual investors we have to realize is that it really is the economy and the economy has shifted and it's really shifted in a big way.
I know a lot of people think that the economy should be on the rebound because we're really kind of moving past the bulk of the pandemic issues but realize markets often times will buy the future today. That means they're looking down the road and they're trying to make a judgment call on the future by the way things are getting priced today.
Whether it's today or at any point in my three and a half decades in this industry, the most common question I get is, “So where's the market headed?” People want to know about the future and so they ask. The problem is oftentimes, instead of just wanting to know about the future, people try to project what the future will be. Hopefully not offending anyone currently aspiring to be a predictor of weather but most people are less accurate in their projection about the future than the weather reporter is!
So, let's simply adjust our thinking and accept the fact that stock market returns like we've had in the last few recent years were well above average and that the average is going to hold true for buy and hold investors. Since the first day of this century, the average annual return for the S&P 500, including dividends, barely crossed the 7%/yr threshold. If the market averages above that for a few years, guess what will happen to bring it back into line? Yes, negative periods will occur.
Is it our outlook that 2022 will be a negative year? To be quite candid, we don't make long-term predictions on markets, but currently, our largest holding(s) across the board are money market holdings and super short-term bonds we took on to bring stability to our holdings. (In my 3 and a half decades in this industry I have never found anyone that can look farther than maybe four or five months down the road and consistently come up with outlooks that have credibility and turn out to be relatively correct). We look at what markets are currently telling us and we accept that as fact. Currently, the markets are telling us things are slowing down in a multitude of areas and to act accordingly.
We remain watchful!
Ken Graves, Chief Investment Officer
Capital Research Advisors, LLC
CaptialResearchAdvisors.com
Capital Research Advisors, LLC,
4185 B Silver Peak Parkway,
Suwanee, GA 30024
770-925-1000
800 -767- 5364
All rights reserved