Feb 15, 2022 Market Update: February 15th, 2022
The U.S. economy continued to grow at a fast pace. 4th quarter 2021 data showed that the U.S. economy grew 5.7% for all 2021, the most significant increase since 1984 (1). 2021′s strong growth created a lot of good outcomes, including a record 6.4 million jobs and higher wages to workers. But it also brought the highest inflation in 40 years. To slow down inflation, the Federal Reserve was preparing for interest rate hikes this year. The expectations of a less accommodative Federal Reserve and quickly rising interest rates led to market volatility. As of 2/11/2022, the S&P 500 Index was down over 7%, while the tech concentrated NASDAQ 100 Index was down more than 12%. Both Value-oriented U.S. stocks and non-U.S. stocks have held up better than the S&P 500 Index.
Tighter monetary policy and higher interest rates could continue to generate above-average market volatility in the coming months. Therefore, we think it is important to keep a long-term perspective and assess your risk tolerance and objectives if you feel anxious about your portfolio.
What Past Market Declines Can Teach Us
Choppy markets can lead to anxiety and discomfort. When volatility increases, it is perfectly natural to worry about how fast—or how far—markets may fall, and beyond that, how long it might take for stocks to recover and get back to previous levels. Keeping a long-term perspective is always important, but it’s essential when markets are volatile and emotions are running high. A look at history shows that while markets react to news events in the short term, historically, they reward patient investors over long periods.
Looking back at data since 1952 shows that stock market declines have varied widely in intensity, length and frequency, but downturns don’t last forever (2).
Market corrections of 10% are surprisingly common and have happened on average once per year. More significant corrections of 20% or more, occurred about once every six years. Unfortunately, it is impossible to tell if this will turn into a larger correction. There have been 23 market corrections of 10% or more since November 1974, and only five of them became corrections of 20% or more (1980, 1987, 2000, 2007 and 2020) (3).
Sometimes averages and medians don’t give us the full picture. The difference in magnitude among past drawdowns is considerable and there is also significant dispersion in the length of the drawdowns and recoveries. For example, in 2020, we saw the fastest ever bear market and also one of the fastest recoveries ever. Of course, we know this doesn’t mean the next one will be similar. While easy to identify in hindsight, attempting to predict when markets will “peak” or “bottom” is unlikely to be a fruitful endeavor.
Please contact your advisor if you would like to review your accounts.
- U.S. Bureau of Economic Analysis
- Table from Capital Group
- Schwab: “Market Correction: What does it mean?” The market is represented by the S&P 500 Index.
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