As the year 2022 stock price declines have continued through most of February, we are writing to follow up on our January Special Comments. February’s YTD figures − which include the remarkable gains from yesterday (February 24th), when Russia invaded Ukraine and the intraday price range (low to high) was 4% (using the S&P 500 to represent the US stock market) − are as follows:
- From the November 2016 level of 2,140, the S&P 500 gained approximately 50%, to 3,225, by January 2020, just before the start of the pandemic.
- At the low of the pandemic, in late March 2020, the index had declined all the way back to 2,237, or just 4% above November 2016.
- From March 2020 through year-end 2021, the S&P 500 soared to 4,766, for a gain of 120% (more than doubling).
- Through Thursday, February 24, 2022, the S&P 500 index has declined to 4,288, which, while approximately 10% below year-end 2021, is 100% higher than November 2016. (Note: a decline of 10% is referred to as a “correction.”)
- The war in Ukraine has been added to the list of current negative events, which includes higher inflation leading to likely higher interest rates, and the continuing, albeit declining, impact of the COVID-19 pandemic.
- No one can consistently and accurately predict whether the declines have further to go before prices become attractive again to buyers. Indeed, stocks closed higher during the day of the Russian invasion. To PPA’s thinking, this reinforces the idea that even if you know about an event in advance of its occurrence, you could just as well be wrong about how the market will react to it.
- The whole concept of asset allocation, which PPA emphasizes at all times, is to allow you to retain your stock positions during the inevitable rough periods, by allocating only a portion of your overall investment portfolio to stocks. Thus, if your allocation is 50% stocks and 50% bonds, a 10% decline in stock prices results in closer to a 5% portfolio decline. Moreover, even in periods of declining bond prices, the extent of bonds declines is historically far less than that of stocks.
- Most of the stock gains from 2016 and the pandemic lows are still intact. Periods of declines of 10% to 20% are not uncommon with stocks – this is the 11th correction since the turn of the century – and so-called “bear markets” of 20% or more should be expected once every few years, especially after the huge gains of the past three years. For more details and a historical chart, see https://www.nytimes.com/article/stock-market-correction.html.
- Since the likelihood of the Fed raising the short-term interest rates it controls has become an important news item, we present a similar recent history of the ten-year US Treasury bond yield, which is the benchmark used by market participants in buying and selling bonds.
- November 2016: 1.86%
- Year-end 2020: 1.50%
- Pandemic lows (March 2020): 0.76%
- Year-end 2021: 1.51%
- Current (February 24, 2022): 1.96%
There is much to discuss regarding these figures in future Monthly Comments, but it is worth noting that the ten-year yield often anticipates the Fed’s actions, and it is not possible to determine how much of the Fed’s likely future rate increases are already priced into the ten-year yield. If the timing of the rate increases is sufficiently spread out, bond investors should have higher returns as they receive the higher interest rates.
As always, please contact your PPA advisor with any questions. We are here to help.