It has been a turbulent 2022 thus far. The S&P 500 Index had its worst April in more than 40 years, the Nasdaq entered a bear market on April 26 with its more than 20% decline, and bonds, which typically provide ballast for diversified portfolios during periods of stock market volatility, have not protected investors.

Markets face a number of threats. The COVID-19 pandemic has contributed to a disappointing start to the year for the U.S. economy as evidenced by the -1.4% growth in gross domestic product (GDP) reported on April 28. COVID-19 continues to disrupt global supply chains amid intermittent lockdowns in some of China’s largest cities. Russia’s devastating assault on Ukraine, arguably the biggest geopolitical threat in Europe since WWII, has added to the worst inflation problem in the U.S. since the 1970s. The bond market is now pricing in nine more Federal Reserve (Fed) rate hikes, after looking for only three when the year began. That’s a lot for investors to digest.

But during a market correction it’s easy to forget that this volatility is actually quite normal.  So, let’s turn to the historical data for reference;

  • The S&P 500 Index has fallen 14% peak to trough this year, the average drawdown of all years.
  • During midterm election years, the average stock market correction is 17%, but stocks rebounded 32% on average following those midterm year lows over the next year.
  • Of the last 21 times the S&P 500 has been down double-digits since 1980, stocks rallied back to end the year positive 12 times with the average gain a stellar 17%.

We concede a double-digit gain in 2022 is unlikely, but a U.S. consumer willing and able to spend, which makes recession unlikely in the near term, and steadily rising corporate profits still make a positive year for stocks in 2022 more likely than not in our view.

Inflation remains a big concern, but a number of factors could put downward pressure on prices beginning this summer. On the supply side, where most of the problem lies, supply chain normalization and more jobseekers coming off the sidelines could help ease pressure on goods, prices, and wages. An eventual cease-fire in Ukraine could remove some of the upward pressure on commodity prices. On the demand side, higher interest rates can help cool housing.

I feel like I say every day that the bond market is already doing some of the Fed’s work with the 10-year Treasury yield doubling in four months to 2.9%. These factors could easily cut headline consumer inflation in half by year-end from the current annual pace of 8.5%.

The outlook for corporate profits remains positive and may help prevent stocks from pulling back much further. Coming into this week with about 180 S&P 500 companies having reported, double-digit earnings growth appears within reach while analysts’ estimates for 2022 have continued to rise. These numbers are excellent considering slow economic growth, supply chain disruptions, and inflationary pressures.

The investing climate is quite challenging, but history suggests patience will be rewarded. Investors, there may be some downside and continued volatility in the short term, nevertheless consumer and business fundamentals remain supportive. Strong profits and lower stock prices mean more attractive valuations. Our belief is that current levels will end up being an attractive entry point over the intermediate to long term.

Stay safe and stay the course.  Also, happy Mother’s Day to all the mother’s that make it happen day in and day out.  I know how lucky my kids are and how grateful I am for my wife, and my mom.

Please contact me if you have any questions

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