Market Volatility Update

Vincent Scarsella 

2022 has been a very challenging year for many so far. Not only have investors had to deal with a very volatile stock market, but they have also had to deal with a very volatile bond market as well.  These bond losses have made the stock market volatility feel even worse, as rising interest rates have caused bond prices to fall.  Markets love certainty, and unfortunately, right now, there is a ton of uncertainty in the global economy.  High inflation, a Federal Reserve which is tightening financial conditions, COVID-19 shutdowns in China, high gas prices, a disrupted global supply chain, and all of this while there is a war in Ukraine have caused the S&P 500 to be down 14.35% as we write this letter, and the bond market to be down 8.50%.  Although many may feel that there is no good news in sight, we believe that putting things in perspective may help to calm some nerves moving forward.

 

It is important to remember in times like these, that investing is not timing the market.  You must be right twice when you time the market, the first is when to get out (when the market has topped) and when to get back in (when the market has bottomed). Markets can turn very quickly, and in these volatile times, it could take one spout of good news to swing the market momentum in the positive direction, and even missing just one big up day can significantly reduce the performance of your portfolio over time.  History shows us that the biggest daily gains typically do come in down markets, making timing the market even more unpredictable. Studies have shown us that market timing can have devastating results.  Seven of the best 10 days occurred within two weeks of the 10 worst days.  For example, the second worst day of 2020 (March 12th) was immediately followed by the second-best day of the year.  Even missing the best 10 days in the market can reduce your overall return by more than half. [1] Time in the market is better than timing the market.

 

Pullbacks are often a time of panic for many investors and understandably so. If we could instead look at pullbacks as a reason to analyze and assess different things, it may be the case that pullbacks represent attractive buying opportunities. Rather than act on emotion, it is important to put these events in context to determine where to go moving forward.  For example, declines in the market are quite normal.  If we take a look at the S&P 500 since 12/31/1945, historically, the majority of market pullbacks have registered declines just under 20%.  Pullbacks within the ranges of 10-20% are not uncommon, occurring frequently during the normal market cycle.  While these can be unnerving, they generally will not destabilize a well-diversified portfolio.  Declines in the 10-20% range have occurred 29 times since 12/31/1945, with an average decline of 14%.  It typically takes around 4 months to bottom and then another 4 months to recover this loss[2]. The average Bear Market (when an index closes at least 20% down from its previous high) lasts around 11 months, with an average loss of 32%. While Bull Markets (from the lowest close reached after the market has fallen 20% or more, to the next market high) on the other hand last over 4 years, and have an average cumulative total return of 155%.[3] This shows the good in the market happens so much more often than the bad in the market, but the psychological affect makes the bad seem much more pronounced and longer than the good.

 

At Sgroi Financial, we prepare for times like these, and internally we discuss how to curate the portfolios to hedge to the downside for the bad times. There has been a lot of good over the years, but we have built these portfolios knowing market volatility is a normal part of the investing process.  As always, we truly appreciate all the trust and confidence you have placed in Sgroi Financial.  If you ever would like to discuss your portfolio or have questions on how market volatility affects your portfolio, please do not hesitate to reach out.

 

Investing is subject to risk including loss of principal invested. Past performance is not guarantee of future results. No strategy can assure a profit nor protect against loss. Please Note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.

 

Citations

[1] JPMorgan principles for investing – Staying Invested Matters

[2] Guggenheim Investments crucial conversations – Putting Pullbacks in Perspective

[3] First Trust Portfolios – History of U.S. Bear & Bull Markets

 

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