The first five months of 2022 could be characterized as unusual. The typically safe, conservative bond allocations in portfolios are in the red. The often forgotten, long underperforming commodities are seeing their day in the sun as one of the only asset classes trading in positive territory. The S&P 500 and Nasdaq Indexes have closed down for seven consecutive weeks, their longest losing streaks since 2001. This streak has led to the “B” word being mentioned more often as the indexes have been in a steady downtrend since their January 3 record high. The S&P 500 Index nearly made the discussions a reality last Friday when it almost closed in bear market territory, defined by a 20% decline from its most recent record high.
Many of the stock market’s defensive sectors had been doing relatively well this year. Although most are down on the year, they are down less than the broad market, adding value to portfolios. Last week’s earnings reports from Walmart and Target coaxed investors to question some consumer staple stocks over worries that inflation is causing a significant impact on consumer behavior. Both companies continue to have strong sales and say the consumer remains resilient; however, consumers are becoming more selective in their purchases. Essential items continue to be in demand, but the strong sales of discretionary items have weakened as consumers consider a good’s value and affordability before purchasing. Part of the problem is that Walmart and Target chartered ships to avoid the supply chain bottlenecks and meet the demand for the discretionary items consumers are now questioning. This leads to inventory levels being stagnant and forcing companies to write down inventory, which puts pressure on company profits, resulting in a sharp sell-off in their stock prices.
In times of volatility, the markets can be daunting and often lead investors to question their portfolios. Luckily, we can use history as a guide on how to react when markets feel uneasy. On the equity side of the equation, over the past 40 years, stocks have declined 14% every year on average. However, they only ended the year in negative territory nine times. When equity markets ended the year in the red, only once (from 1999 to 2001) have they had consecutive calendar years of negative returns.
Rather than focusing on the last week or even the previous five months, use volatility as an opportunity to reposition portfolios, harvest tax losses, or even invest capital in beaten down, quality companies. No one exactly knows when we will return to growth, but we have all the confidence this is just another volatile period to endure on the path to long-term success.
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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