I receive many questions when the market feels like turning volatile. It seems like just yesterday (even though it was December of last year) that we were all very comfortable with our risk tolerance and investment objectives. We have had an incredible run in the S&P 500 over the last 3 years with a compounded return of 14.22% and 10 years with a compounded return of 12.37% according to Morningstar.com here.
So, when does this correction end? That really is the most frequently asked question we are seeing in our office. I can only voice an opinion on it so here it is…
We have three main factors at play right now. 1) The war in Ukraine 2) High inflation 3) Supply-chain disruptions. Let’s try to go through them very topically to get an idea on where we can put these puzzle pieces in place.
1) The war in Ukraine – Geopolitical issues seem to always be popping up and affecting the markets. It’s one of the reasons I tend to stay away from international investments. In fact, our US investments are exposed to international pressures already at a decent size—anywhere from around 30-50% as noted here. If the war can get in our rear-view mirror in the next quarter or so, that will relieve some geopolitical pressure on the markets.
2) High inflation – This has been thorn in the side of the markets for about a year now, especially the bond market. The bond market affects any investment objective that’s not Aggressive in our portfolios. This is why many of you are experiencing more volatility than you are accustomed to seeing. The U.S. Aggregate Bond Index is down over 9% through May-one of the worst years in decades as noted here. The Federal Reserve had thought inflation was transitory last year but has since changed its stance. It seems because the Fed has now recognized the long-term stay of inflation that it will make the necessary policy changes to correct. This usually takes some interest rate hikes, then a sit-and-see approach to watch for improvements in the economy. If they do it correctly, we will normalize very quickly. If they raise rates too fast, it might push us into a recession. If that happens, it will probably extend this bearish-feeling market another 6-12 months.
3) Supply-chain disruptions – China has been a big player for our supply chain. They recently came out of a two-month lockdown period. This should help open the “widget” factories that many of our US-based companies rely upon. This won’t be an immediate turnaround. However, it is a much-needed release valve for companies that make anything from kayaks to dishwashers.
If all these factors were to clear up perfectly, we might see a turn to the upside in just a quarter. However, any hitch will continue to extend the bumpy ride we are all seeing. I’m always very optimistic when it comes to the markets. I’ve seen four of these large pullbacks in my investing lifetime. Before the cycle of 2022 that we are in now, there were three that I remember having affected many investors…2000-01 Dotcom bubble, the 2008-09 Housing Crisis, 2020 Covid-19. As I recall, each one was very worrisome for many investors. It just took time and patience to watch it all come back to today’s levels.
All that brings me to the most pressing reason for this letter. It's always important to make sure you are in the correct risk tolerance and investment objective for YOU. That is why I go over it at every Investment Annual Review. Your investment risk tolerance is the solution to those that try and avoid the big swings volatility brings to investments. These periods will inevitably happen. Believe it or not, they are merely a part of investing over the long term. I never want you to lose sleep over your investments. Once this current volatility subsides, and it eventually will, it is extremely important to make sure you reexamine your comfort with your risk tolerance. That’s where I want to help you the most. Let me help you decide on the best fit for you.
I hope you have an amazing start to your Summer!
Larry Mroczkowski
President and Wealth Advisor