2022 Volatility: Week 3

Volatility Overview

The team at Oak Harvest has been anticipating and messaging to clients and prospects a rocky start to 2022 since early November.  Selloffs like the ones we are currently experiencing are never fun.  They aren’t fun for you, they aren’t fun for us, and almost everyone I know has their anxiety rising, including us.  These are very normal feelings. And it is exactly at times like this that having a rock-solid financial plan already in place, along with the appropriate allocation is so important. Risk and volatility cannot be avoided in the stock market. The more exposure you have to stocks, the more risk you are taking on, and the more volatility the portfolio will undergo in pursuit of long-term higher returns. Understanding this, staying calm, and remembering your long-term strategy and plan is a part of being a more successful investor.

We believe, and history argues, that the volatility in the market leads to long-term reward for investors. And our view of the current volatility is that it will lead to further upside in the 2nd half of this year, as we will explain.

Shifting Fed Policy and Volatility

As the team at OHFG has discussed since early November of 2021, our team was expecting a marked uptick in realized volatility for the first half of 2022.  History from the current cycle since 2009, had shown that the early shifts in Federal reserve monetary policies brought with it increased realized volatility and larger percentage declines in the indexes.

Periods from 2011-12, 2015-16, and 2018 were all periods with corrective or sloppy and choppy trading when the Fed was slowing or reducing its balance sheet.  The current selloff continues to resemble the time period of first half 2010 and first half 2018. Almost weekly we have messaged this in our client and prospect contacts.  Our first half 2022 outlook, released on December 3rd under the title “Curb Your Enthusiasm Yields to a Bull Market Buy” can be found in video format at this link:

https://www.youtube.com/watch?v=Ybk6bjjkILQ&list=PLxj0FBH5Bt8twiZx9RvxpW9AydohZ5W3-&index=7

The summary of our outlook is that our team expected our first correction in the S&P 500 in the early to mid first quarter of 2022 and the cash S&P500 index to return back to its 200-day moving average which at the time was between 4400-4450.

Year to date the S&P 500 is down -7.7%. It’s down -8.8% from its closing all-time high on Jan 4th.  Energy, specifically old-line fossil fuels, is the only sector that is positive with a gain of 12.8%. The worst groups in the index have been Consumer discretionary, down – 12.2% and Technology down -11.4%.

Current Market Volatility

Much of the year-to-date losses came last week with the S&P down almost -5.5% for the week.  There is an old saying on Wall Street that the markets take a stairstep up on a wall of worry, but an elevator down on the back of fear. That has been 100% the case year-to date. On the week, Consumer Discretionary was down -8.5%, Communication Services, that’s internet companies, down -7.0%, Financials such as banks were down -6.4%.  No groups were left unscathed, but as always on the way down, diversification helped as Consumer Staples, think snack food or paper towels, was down just short of -3% and Utilities down just under -1%.

We understand, these are not enjoyable numbers.  These trips south in the market are not fun, which is why, for the first time in almost 21 months, we started messaging our thoughts on a coming correction months ago.

The Historical Data

Recall the data on the markets. Since 1950, the S&P 500 has had an average draw down of 13.6% over the course of a calendar year.  In over 60 percent of all years over the last 100 years, the S&P 500 has experienced a -10% drop.  Think about that for a moment.  In 2 out of three years, the market has declined -10%.  According to data compiled by Ben Carlson, over the last 72 years, there have been 36 double-digit corrections, 10 bear markets and 6 recession moves.

That means, on average, the S&P 500 experienced a correction, defined as -10%, once every 2 years, a bear market, defined as -20%, once every 7 years, and a recession move of -30% once every 12 years.  In other words, the historic data has been saying for months, we were due at least for a correction in the first half of 2022.  Stock markets don’t go up in a straight line because the economy does not grow in a straight line either.

Yes, things are worse in the growth-oriented areas of the market such as the NASDAQ where the markets are already down -15% since late November. Higher expected growth, such as many NASDAQ growth and technology stocks, come with higher volatility and higher risk, necessary in order to get higher expected returns.

Where does the selling stop?

So to the $1 trillion question: when and where will the selling stop?  No one knows for sure…including us. However, just as there were early warning indicators flashing in early November of last year when we discussed warning signs like forward volatility curves, interest rate yield curves, and investor sentiment, many of those exact same indicators are starting to flash signs that we are nearing the beginning of the end of the move down.

Oak Harvest will cover these in more detail over the next few weeks, but those options “insurance salesmen” that we mention a lot are starting to see the opportunity of selling insurance after the hurricane has already come ashore. Additionally, things like investor sentiment in the once loved NASDAQ large cap technology stocks, has rapidly sunk from euphoric to lows not seen since the great recession in 2008/09 near the lows.  And a classic contrarian indicator is when sentiment shifts “too far to one side of the boat.”

A 2022 Roadmap?

While there is no such thing as a perfect roadmap in the markets, so far, the start of 2022 has been pretty much what our team has expected.  A sloppy, choppy mess. Which believe it or not, is just the normal pattern of behavior and action of our markets during Federal reserve tightening cycles. This isn’t new.

What’s important to remember is that the optimistic news is that if 2022 continues a path of “normal” albeit volatile, then history indicates that 2022 is likely to end on a better foot than it started. U.S. stocks have historically performed well during periods when the Fed raised rates, as a growing economy tends to support corporate profit growth and the stock market. In fact, stocks have risen at an average annualized rate of 9% during the 12 Fed rate hike cycles since the 1950’s and delivered positive returns in 11 of those instances.  Those averages would have the S&P closing out the year near 5200.  This is not guaranteed in anyway, but that’s the historic data, and our current view.

Volatility, Market Timing, and Keeping Long-Term Focus

No one can call and tops and bottoms in the market consistently, and “put you in and out” ahead of upwards and downwards volatility consistently. Anyone who says they can is someone you should look at with considerable skepticism. Such attempts are called “market timing,” and in spite of research showing that market timing largely does not work, is an obstruction to achieving long-term investor objectives, and that it is “time in the market, not timing the market” that matters, it seems to remain a popular idea with some media figures and others. Our view is that this is largely driven by emotion, and emotions are powerful, without question. Learning to dealing with our emotions in regards to our money and the markets in a non-destructive manner can be a critical concept for many investors. For those interested, or perhaps facing a strong emotional response to the current market volatility, Episode Two of our podcast, The Investor Mindset, looks directly at this topic.

The stock markets are about long term expected returns, not short-term volatility, market hype, media panic, or guarantees. Understanding that the market is going to have both ups and downs, learning to keep those strong, negative, emotional reactions in check, and always keeping an eye on your long-term financial plan, are core parts of being a more successful long-term investor.

Which is why the whole team at Oak Harvest – not just the investment team, but our financial advisors, our planners, our company leadership, all of us –  is dedicated to not just to investment management, but financial planning, and holistic wealth management on an individual level.  When you meet with us, our advisors work to understand your goals, your risk tolerance, your time horizon, and then structure a long-term plan that may include a risk-appropriate allocation to risk assets, like stocks, all of which aims to accomplish your long-term goals.

Oak Harvest YouTube Channel

https://www.youtube.com/channel/UCkLvOm9F5iC01-hHxRmUXpQ

Stock Talk Podcast (Weekly Market News and Opinion from Oak Harvest):

https://oakharvestfg.com/stock-talk-podcast/

The Investor Mindset Podcast (Introduction to Critical Concepts for Investors):

https://oakharvestfg.com/investor-mindset/

First Half 2022 Outlook – Curb Your Enthusiasm Yield a Bull Market Buy.

 

This content contains general information and express the views of Oak Harvest Investment Services. All data, articles, and information cited are believed to be reliable at the time of creation; however, Oak Harvest does not warrant any information contained herein to be correct, complete, accurate or timely.

Oak Harvest provides links to content produced by other websites that OHFG does not control, and Oak Harvest does not necessarily approve or endorse such content and does not guarantee its accuracy. Nothing in this content constitutes personalized investment advice. Any charts, indicators, or graphs included or referenced in this content have limitations, and no such material is able, in and of itself, to provide a buy or sell recommendation for any security. Strategies and ideas discussed may not be right for you, and views and opinions expressed may change without notice. Strategies and ideas discussed will not apply to all client accounts or portfolios.

Nothing in this content constitutes a recommendation, or an offer or solicitation to buy or sell securities. Oak Harvest makes no assurance as to the accuracy of any forecast or projection made. Not all past forecasts or projections have been accurate. No current or future forecasts and projections are guaranteed to be accurate.  And future forecasts may not be as accurate as any forecasts discussed. Indexes like the S&P 500 are not available for direct investment and your results will differ. Past performance is not indicative of future results. Investing involves the risk of loss.

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2022 Volatility: Week 3
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2022 Volatility: Week 3
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The team at Oak Harvest has been anticipating and messaging to clients and prospects a rocky start to 2022 since early November. Selloffs like the ones we are currently experiencing are never fun. They aren’t fun for you, they aren’t fun for us, and almost everyone I know has their anxiety rising, including us. These are very normal feelings. And it is exactly at times like this that having a rock-solid financial plan already in place, along with the appropriate allocation is so important. Risk and volatility cannot be avoided in the stock market.
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Oak Harvest Financial Group
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