2022 Stock Market Volatility |Nowhere to Run, Nowhere to Hide | Stock Talk Podcast
Market correction in the S&P500 and “bear market” in the Nasdaq Composite, emerging markets and small caps, and the markets tune is playing the Martha and Vandellas tune, Nowhere to Run to, Nowhere to Hide.
I am Chris Perras with Oak Harvest Financial in Houston and welcome to our weekly stock talk podcast. Before we get into this week’s topic on market volatility, please take a moment to click on the subscribe button and click on the notification bell so you will be alerted when our team uploads our latest content.
First off, the first half of 2022 has not been fun for anyone, Including our investment and financial advising teams here at Oak Harvest. And that is with our team having expected a 1st half market correction and high volatility. We first laid out this scenario back in November of last year. Even so, this is not enjoyable for anyone short term.
Bond market volatility has caused fixed income losses which then spread to equity markets and create volatility there and elsewhere. We have discussed the notion of collateral damage amongst leverage asset managers multiple times the last 4 years and its effect on the rest of us who invest unlevered, in equities for their longer term, measured in years, positive returns versus fixed income.
Last week was a case study in the perils of leveraged investing. In the span of less than 24 hours after Wednesdays Federal reserve meeting, the S&P500 gained +125 points and then lost -200 points. Virtually in straight lines. How can this happen you ask? Leverage. For whatever reason, the Federal Reserve meets and releases their statements in the afternoon when only one major market in the world is open, the markets here in the United States. So, post Fed meetings, computers, and anyone else in the world who wants to trade short term around this event have few alternatives, here in our markets. This seems to do little more than create massive, short-term volatility which traders love, and long-term investors despise.
Come Thursday, when global markets opened, there was clearly a massive margin call, or forced selling of leveraged positions, across both stock and bond markets. Market historians have pointed to only two days the past 25 years when the S&P500 was down -3% and the 10-year treasury markets were down -1%. For market historians those two dates were Oct 9th, 2008, and March 18, 2020.
While unnerving days for sure, looking back at those prior times one would see that each of those days was about 1 week before the overall S&P500 bottomed, or when the market leaders for the next up move started to appear. In the case of October 2008, tech stocks, high growth stocks and staples started bottoming relative to the markets within a week of that move. And in March of 2020, the entire market troughed on Monday March 23rd and started up on Tuesday the 24th. A similar scenario now could be playing out and would say we are near to a bottoming process or formation in the equity markets.
The first step in this process would likely be a process measured in weeks. Remember, our team has not expected 2022 to be a year of so called “v-bottoms” like 2020 and 2021. The first step would be for the entire treasury bond market to calm down and volatility there to slowly bleed out of those markets. This would begin to restore calm in the collateral markets and work its way back into lower volatility in equities and other asset classes.
Here’s some additional material that is looking familiar to many market followers that gives us some idea that calm might begin to show up in Treasury markets in the coming weeks. Looking back at the 2013 “Taper Tantrum” in the bond markets, which was also caused by a tightening of Federal reserve conditions and balance sheet reduction, one will see a remarkably similar move in height and time of the treasury sell off in 2013.
The move lasted about 8 months and the worst of that time was over after about 6 months. Yields did increase a bit more but most of the tantrum was over after 6 months. We are now 5 months into our current bond taper tantrum, and if history is a guide, the worst should be nearing an end in price with the time component still having some weeks to go as the markets adjust to the reality of the Feds path.
The Oak Harvest investment team runs diversified equity portfolios for our clients. We believe that at times higher growth stocks without dividends will be the markets favorites and at other times more value oriented, “boring”, lower growth, moderate dividend, stable or low growth free cash flow companies might be in vogue.
We try to blend these two styles knowing that in market corrections like the one we are in on the S&P500 or bear markets as the Nasdaq has endured, there are few if any real places to “hide”. “Hiding” is not something one should try to do in the equity markets. That’s not how they are structured. You should either subscribe to the value of the ability of the equity markets, our economy, and good businesses to compound your investments over years and decades or look to find lower risk and lower return alternatives,
I ask you, in all the years of listening to or reading about Warren Buffett, have you ever heard him once use the term “hiding” when discussing the stock markets? No, if he does not see long term opportunity, he lets cash build up or does not invest what he doesn’t need to. However, he also rarely or ever liquidates his prior investments in front of turmoil or during it. Airline stocks might be his one exception. He does not try to “hide”. He takes his lumps with everyone else and knows the long-term rules of the public market investment world. The number one rule being, long term compounded returns are about time in the market, not market timing.
At Oak harvest, we think our clients are best served by us helping them plan for their future needs and risks, instead of focusing on the past. The future is always uncertain and that is why our advisors and retirement planning teams plan for your retirement needs first, and your greed’s second.
Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals and needs first and your greed’s second. Call us at 281-822-1350, we are here to help you on your financial journey into and through your retirement years.
CFA®, CLU®, ChFC®
Chief Investment Officer, Financial Advisor
Chris is a seasoned investment professional with over 25 years of experience working with some of the most successful money management firms in the world. Chris has made it a point in his career to adapt as the market landscape changes, seeking to utilize the appropriate investment strategy for a given market environment. His transition from managing billions of dollars at the institutional level to helping individuals and families retire is guided by a desire to see first-hand the impact he is making in the lives of clients at Oak Harvest.