Some Thoughts on the Markets - Andy Vix

2022 has been a tough start to the year for financial markets.  We all know the headlines and they are not good. As of this writing the S&P 500 is down approximately -13% YTD.  Perhaps more alarming is the drop in bond prices as interest rates have been moving higher ahead of the anticipation of the Federal Reserve raising interest rates over the course of the year (they increased the Federal Funds rate by .50% Wednesday).

The AGG (an ETF that tracks the US Aggregate Bond market) was down just under 10% to start the year.  Going back to 1980 there have only been 4 negative years for the Bloomberg US Aggregate Bond Index*.  Traditionally bond holdings serve as a ballast during stock market corrections.  That has not been the case with this correction (rising interest rates are typically not good for bond prices).  Like so many things in the world these days, there’s nothing traditional about what is happening in the world.

Below is a chart that was recently posted by Ben Carlson (@awealthofcs)  that shows the intra year drawdowns of the S&P 500 going back to 1928.  What is interesting (as Ben notes) is there have been 59 years with drawdowns over 10%.  Equally interesting is that 58% of the time the S&P 500 finished the year positive.  The average intra year decline is 14%, very close to where we are today.

Nobody knows how long the current correction will last, however it is important to note that they are normal.  If there is a silver lining for market declines it is that future expected returns go up.  The headlines will likely continue to be negative for the foreseeable future.  It is important to note that markets tend to be forward looking. The volatility index/fear gauge (VIX) has been above 30 at some point every month this year.  Also the AAII investor survey is at the highest bearish readings since March 2009 (59% bearish).  For some context the highest reading during the pandemic was 51% in April of 2020.

While there is no guarantee, history suggests that if the news/data is even just “less bad” moving forward that could be a benefit to markets looking ahead.  During periods of heightened volatility (which we haven’t had for a while) it is helpful to try to keep a level head and avoid emotional decisions.

As always please feel free to reach out with questions or concerns!

Andy

* https://www.thebalance.com/stocks-and-bonds-calendar-year-performance-417028