After a rocky start to the year, a number of major U.S. equity markets are in or near correction territory. Understandably, the not-so-distant volatile days of March 2020 precipitated by COVID are still fresh in everyone’s mind.
Corrections, such as the one just experienced, are a healthy and natural aspect of investing. I know… how can a decline be healthy? The answer lies within investor sentiment. Fast-paced market advances often lead to overconfidence. Corrections are simply the market’s way of giving investors a little dose of reality, just enough to right size expectations and sober investors from their euphoric state.
Corrections are often caused by something unexpected and/or a threat to the status quo. In the current period, the market is wrestling with a few issues, these include:
1) A rising interest rate environment,
2) Stretched U.S. stock valuations,
3) Moderating economy (from red hot to sustainable growth),
4) Ongoing pandemic with fits and starts,
5) Inflation deliberations, and now
6) Escalating geopolitical tensions.
The market is a worrywart at heart. The market is always dealing with some uncertainty, future prognostications, or what-if scenarios. In fact, economic data rarely experiences such overwhelmingly positive coordination as seen in the first half of 2021. Economic data is typically dynamically mixed, some positive and some negative. It’s the aggregated evaluation that is most valuable.
2022 was expected to be a challenging investment environment. Many of the above-mentioned issues were emerging toward the end of 2021. Market history shows that the leaders during a bull market tend to lead during a correction. The reason is simple, the valuations of the leaders get stretched more than the laggards making them more sensitive to uncertainty. As such, it makes sense that growthy companies which led the ascent also led the decline. Since the future and its turning points are unknown, maintaining a diversified portfolio with exposures to growth and value names leads to better wealth-focused portfolios.
Looking forward, many of the identified issues are likely to dissipate. Monitoring various economic data suggests the economy is still in a growth mode, hence a positive backdrop. From the perch of the red hot 2021’s first half, it’s understandable for some observers to misinterpret a moderating economy. However, with proper context and historic norms, the first half of 2021 was actually the outlier… more recent economic data indicates economic growth moderating to a normalized pace.
Ultimately, 2022 may be a bumpy ride. The lifespan of the market’s concerns is unknown. Focusing on the larger picture with a long-term perspective should help mitigate short-term angst. The best portfolio positioning in times like these is a diversified portfolio with your specific objectives in mind. As an aside, this week Punxsutawney Phil predicted six more weeks of winter. Have a great weekend and reach out as always if you want to chat. Warmest regards.
Diversification may help reduce, but cannot eliminate, risk of investment losses.
The opinions expressed are those of Heritage Financial and not necessarily those of Lincoln Financial Advisors Corp.
Forward looking statements may be subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. 1Moringstar