An Ornery Start For Stocks in 2022 [Video]

The start of the year has been an ornery one for the market so far.  Last week was particularly volatile as markets swung forcefully in both directions almost every day.  At one point the S&P 500 dipped 9% from its most recent high before regaining some ground this week. You have to look all back to October 2020 to find a decline of similar magnitude.  Since then it has been almost 15 months of relatively smooth sailing until recently.

Looking at the chart below, the S&P 500 has historically experienced 5% declines about 3 times per year with 10% declines about every 16 months:

While last week was not fun, the market's downside volatility has not been outside historical norms.  Stocks have a tendency to be volatile in the short term, but compensate investors handsomely over the long-term.

Much of this year's volatility can be attributed to anticipated actions by the Federal Reserve. The Fed's dual mandate is to promote: (1) maximum employment; and (2) stable prices.

Maximum Employment Has Arrived

In March 2020, the Fed cut short term rates to near zero and began purchasing $120 billion per month in Treasury and mortgage-backed securities as part of its emergency response to COVID.  These efforts were designed to drive down the unemployment rate which had skyrocketed to 14.7% during the pandemic

With unemployment now at 3.9%, it is fair to conclude that the Fed has accomplished its goal of maximum employment over this cycle.  With 1.7 jobs available for every unemployed person, the U.S. economy is at full employment (or at least pretty close).

Stable Prices Remain Elusive

With the unemployment situation under control, the Fed has pivoted to combating the current inflation rate of 7%.  We are are all feeling inflation's effects from our Amazon shopping carts to the grocery store, to the gas pump:

To temper inflation the Fed plans to raise short-term rates to moderate economic growth.  In order to do this, they must first taper and then eventually end the bond buying program.  While the Fed previously telegraphed ending the bond buying program in June 2022, it abruptly accelerated its timeline and opened the door to higher short-term rates as early as March 2022.  This pivot and the fear that the Fed will raise rates too far and too fast has contributed to recent market swings.

We believe the stage is set for continued growth in 2022. The U.S. and global economies will continue to mend and corporate earnings growth should remain strong.  While 2022 has its share of unique obstacles including inflation, rising interest rates, and dwindling fiscal and monetary support, these factors are unlikely to end the current economic expansion

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