Friday the 13th brought some luck to markets as stocks rallied to close the week, although the S&P 500 Index still closed in negative territory for the sixth consecutive week, the longest streak since 2011. It can be difficult to find bright spots during a negative period, but Friday’s rally, which saw 95% of S&P 500 companies trade in the green, shined a light on a week that was on track for more than a 6% loss as of midday Thursday.
Last week, nothing in the market narrative changed to help explain the sharp sell-off, followed by a strong rally. April inflation was reported as less than March but still at multi-decade highs. Federal Reserve Chairman Jerome Powell spoke and confirmed the Fed would continue to focus on taming inflation, meaning expect rates to rise and volatility to stay for the time being. Chair Powell confirming the Fed is not considering 0.75% rate hikes, at least for now, seemed to comfort investors, although rates are expected to increase by 0.50% at each of the next few meetings.
While macro factors are driving stock market volatility, many overlook the ongoing first-quarter corporate earnings season. Companies continue to show resilience in a challenging environment; so far, over 65% of firms have beat expectations for revenue growth. Many companies beating estimates are tied directly to the consumer, so consumers continue to spend money even though consumer confidence has been decreasing due to inflation. This also confirms the current market correction is being driven by multiple compressions from rising rates rather than issues in company fundamentals. This environment allows active mutual fund managers the opportunity to buy strong companies at cheaper valuations. As Chair Powell and many CEOs have said, the short-term might continue to be a difficult period but it could provide an opportunity for investors to set up strong long-term prospects.
Although periods like this are difficult, looking at history can be a helpful guide. Over the last 50 years, the stock market has fallen into correction territory (defined by a decline between 10% and 20% from the most recent high) 21 times, plus six bear markets. Rounding this statistic, we can say every other year, stocks have corrected. This sell-off is on schedule after a bear market in 2020 and no correction in 2021. As troublesome as investing through negative markets might be, markets have recovered from the last 21 prior corrections and additional bear markets. Whether Friday signaled a bottom or just a continuation of volatility, we have no doubt the 22nd correction in the previous 50 years will result in a future gain; however, patience will remain the key.
Author: Joe Clark, CFA | Research Team | Allegheny Financial Group | May 2022
The information included herein was obtained from sources which we believe reliable. This report is being provided for informational purposes only. It does not represent any specific investment and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.
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