After a stellar 2021, it’s been anything but for the stock market to start 2022. Inflation worries, higher interest rates, and Fed tightening were the major worries in January, but that has now been trumped by the Russian/Ukraine conflict. Per the NY Times this morning, “The most significant European war in almost 80 years has begun” with Russian troops pouring over the border and blasts being heard all around Ukraine.
We feel for the citizens of Ukraine and detest the actions of Vladimir Putin. We understand that events like this can cause anxiety and fear. Part of that anxiety and fear is why the S&P500 is in correction territory. As a reminder, a “correction” is defined as a 10% falling in price from its recent high. And it is also why the Nasdaq is flirting with bear territory, reflecting a 20%+ descent from its recent high.
We don’t know how this particular event will exactly play out, but history can serve as a guidance. Typically, geopolitics tend to exert a powerful influence on market prices early on, but a relatively limited influence over time.
Let’s look at the market’s resiliency through several major crises in the graph below.
This graph is a good reminder that markets don’t just go straight up. Markets don’t work that way- they go up and down... and then back up!
Not every calendar year can be an “up” year. As a long-term investor, you not only stay invested, but even may see this as an opportunity. In the chart below, you can see that the S&P500 has averaged a 14% decline each year since 1980. It’s easy to get complacent after nearly two years without a major correction, but corrections typically do happen! Further, when the market comes back, it does so quickly. So, it’s a fool’s game to try to time the market and jump in and out of it. No one has a crystal ball. As comment #3 (at the top of the chart) dictates below, “By going to the sidelines, you could be not only missing a potential rebound, but all the potential growth on that money going forward."
One major positive of this correction is that the market is now cheaper. A pullback / correction like this one might actually be a very healthy thing because it may signify that the underlying assets’ valuation are getting back in line with fundamentals. After a 2021 where we saw “micro-bubbles” bubbling up in many different areas like high growth tech, SPACs, meme stocks, etc; we’re now actually seeing a more sensible market that values fundamentals. Our portfolios at DWM are positioned accordingly.
We don’t know how long the Russia/Ukraine situation will last. But between it, inflation, and some other worries; expect volatility to be more escalated than it was in 2021. Big daily moves in either direction should not be surprising. If you’re a day trader, you’re probably chewing your nails down pretty well these days. But if you’re a long term investor, like our DWM clients, you understand to keep disciplined, don’t let emotions get in the way, and stay the course sticking with your long-term asset allocation target mix. The market inevitably always bounces off its lows to eventual new highs. Sometimes the best action is well thought out, disciplined “no action."