Market Volatility: Don't Fear It, Expect It

Despite stock market weakness, we remain positive based on the following:

  • The U.S. economy grew at an estimated 5.5% last year, its fastest pace since 1984

  • Expectations are that we slow to 3% to 4%, this is better economic growth than the 10 year average of 2.3%

  • Our labor market has rebounded with the unemployment rate dropping to 3.9%

  • Last month we saw the fewest number of Americans filing for unemployment benefits since 1969

  • Housing remains in an uptrend with home prices increasing 18%, according to the most recent Case-Shiller Index

  • U.S. consumers, the main drivers of our economy are still spending, despite high inflation

According to Calamos Investments, in the 41 years since 1980, stocks experienced a double digit drop within the year 21 times. The average drop was 13%. However, 13 of those 21 years, the market finished the year with a gain. For instance, in their graph (see below) we experienced a 34% collapse in stocks in 2020, yet the market was up 18% by year end. Every year is different, nobody knows how this year will play out. Don’t fear market volatility, expect it. It is the price we pay for long term gains. And in hindsight, they always represent buying opportunities for patient, long term investors. The S&P 500 is down 7% this year and the tech heavy Nasdaq is down 10%. Nobody knows when stocks will stop falling but I suspect the weakness likely persists until we get more clarity from the Federal Reserve and their plan for tackling inflation. I believe corporate earnings may be better than expected and could potentially stabilize markets.

What did your parents pay for their first home? Compare that with what you paid for your house. This is inflation. Gradually rising prices is normal, in fact, it’s desirable. If a shop owner can raise prices (due to increased demand for their goods) he or she can open another store and hire more employees. Inflation allows businesses to grow. But too much inflation can cutoff consumer spending. I don’t have to tell you we have an inflation problem today. Prices are rising too fast, outpacing wage gains. The Federal Reserve is going to address it, because its their job. They have two mandates: 1) maximum employment, and 2) stable prices. We are back to full employment with 2021 seeing the best job growth ever. Now the Federal Reserve will attempt to cool inflation by raising interest rates and reducing stimulus. Higher rates will increase the cost of homes, cars, business expansion, etc. This will intentionally lead to less demand and lower prices. But I believe our economy can handle higher interest rates. We’re coming off our best year for economic growth in nearly 40 years! We do not need zero percent interest rates or ‘free money’. Investors fear the Fed will over do it and push us into recession. We’re not in that camp. If the economy grinds to a halt the Fed will pivot and change course, just as they did 3 years ago, after the market fell 20% in the 4th quarter of 2018. Chairman Powell is not afraid to admit they must change because the data has changed. The economy, stocks, real estate, and commodities were overheating. If you want the party to continue in the stock market, we need to take a breather. The drawdown in stocks is positive for the long run sustainability of the rally.

“I think wages going up is a good thing for the people who have the wages going up. CEO’s shouldn’t be crybabies about it. They should just deal with it”
— JP Morgan CEO Jamie Dimon (1/14/2022)

I agree, we should embrace wage inflation. A stronger middle class means Apple sells more iPhones…

Pew Research

Source: Pew Research

 

It’s called a correction for a reason…

Many growth stocks got overvalued, they completely divorced from economic fundamentals. Now we’re seeing a big adjustment, which frankly, is long overdue. Here’s a sample of how far some stocks have collapsed from their 52-week high:

  • Paypal, -43%

  • Zoom Video, -66%

  • DocuSign, -61%

  • Ebay, -26%

  • Lululemon, -34%

  • Peloton, -86%

  • Moderna, -66%

  • Spotify, -46%

  • Square, -56%

  • Beyond Meat, -72%

  • Snap, -58%

  • Twitter, -54%

(source: Morningstar, 1/20/2022)

 Nearly 40% of the stocks in the Nasdaq are down 50% or more!  Meanwhile value stocks (Vanguard Value Index, VTV) is up 20% over the past year, and down just 1.3% this year. (Morningstar).

 

Coming into the new year we made several moves in light of the following:

  • A slowing economy

  • Higher interest rates

  • Less government stimulus

  • An expensive market

We executed the following

  1. Reduced our exposure to technology stocks

  2. We bought back hedges that short the S&P and Nasdaq

  3. Added to value dividend paying stocks in defensive sectors: healthcare, telecom, and consumer staples

 

Illumina, Like Theranos, But Without the Fraud

The most exciting developments in innovation are happening in the healthcare sector. Illumina is a leader in gene sequencing. They recently bought back a company they spun off called Grail. Grail has developed an early detection Cancer test they call Galleri that can screen for 50 types of Cancer in a blood sample. Learn more here: NBC News - Galleri Cancer Screen, Galleri - CBS News, Grail. We initiated a new position in Illumina and are actively researching other companies in genomics. 

The new year is a great time to review your portfolio and make certain you’re on the right track. We should also review your trust, will, beneficiaries, and financial plan.

I look forward to discussing further with you.

Thank you!

 -randy