March 31, 2022
True to the adage, March came in like a lion and went out like a lamb. In the first week of March stocks hit their lowest level of the year so far. Thankfully the market rallied over the next few weeks so that in the first quarter of 2022 the S&P 500 ended down only -4.6%. Bonds took a harder hit with the Bloomberg Aggregate Bond Index falling sharply, -5.9%, in response to increasing inflation data and anticipated Federal Reserve rate increases.
At its low point, the S&P 500 was off more than -12% from its peak. If it felt worse than that, there is good reason. The average stock in the S&P 500 declined a full -20% from peak, as shown in the Strategas Research chart below. A decline of this magnitude signals a bear market, but the investment community withholds that abysmal term unless the index itself hits the marker. Stock owners feel it regardless.
Investor focus is now squarely on the Federal Reserve. Can they manage to combat inflation effectively without pushing the economy into recession? Bond yields are providing a vote of no-confidence, with the 2-year yield trading slightly higher than the 10-year yield (an “inversion”). Consumer sentiment has also declined.
Optimists, however, point to our very strong labor market in defense. Unemployment sits at the low rate of 3.6%. The labor force participation recently ticked higher, showing workers coming back to the job market – perhaps living off savings is more difficult as gas and grocery prices climb? Historically, the U.S. does not go into recession without labor market weakness, and our labor market is a long way from ‘weak’.
Price distortions due to geopolitical events, supply shocks, rumored policy changes (taxes, tariffs, subsidies, etc.), and other market anxieties or exuberances can have a significant impact on short-term trading. Consistently predicting and accurately timing distortions is impossible. We remain focused on the long-term earnings power of individual companies. There are potential challenges in the near-term, so your portfolio is positioned a little more defensively than normal, but we remain optimistic regarding long-term growth and continue to favor stocks over bonds.
Financial Planning Note: There is a potential policy change that could impact your IRA distribution this year if you are in your low seventies. A bill currently working its way through Congress would raise the age for Required Minimum Distributions to 75 years old. It passed the House with broad bipartisan support. If you are between 72 and 75 years old and do not need the funds for living expenses, we recommend you delay taking your distribution until we see if this becomes law. You might be able to avoid income taxes and let your retirement funds grow tax-deferred for a few more years. Please call us if you would like to discuss this further or consult your tax advisor regarding your specific requirements.