Whenever the financial markets experience unusual declines, Park Piedmont Advisors has made it a practice to write Special Comments to supplement our regular Monthly Comments. During 2022, we have already written two such Special Comments, the first as of January 21 and the second as of February 24.
The S&P 500 stock index closed at 4,272 on April 22, after a two-day decline of 187 points from 4,459 (or approximately 4.5%). The year-to-date decline from a high of 4,796 is now 524 points (or approximately 11%).
Note that Wall Street refers to a stock market “correction” as a decline of between 10% and 20%. There have been eleven corrections since the turn of the century – how many do you remember? “Bear” markets, declines of 20% or more, also occur from time to time, especially after periods of large gains.
Perhaps most remarkable, however, is the fact that the S&P 500 value of 4,272 for April 22 is only 16 points below the February 24 value of 4,288 (or less than half of one percent).
You may recall February 24 as the date of our most recent Special Comments and the start of Russia’s war against Ukraine. It is PPA’s guess that most investors think the April 22 level would be considerably lower than that of February 24.
We should also recall that as recently as March 2020, a few months into the pandemic, the S&P 500 had declined to 2,237. The April 22, 2022, level of 4,272 therefore represents a gain of approximately 90% since the pandemic low.
As PPA readers know, it is our view that no one can consistently and accurately predict whether declines have further to go before prices become attractive again to buyers. In an almost perfect example of this thinking, we quote from Jeff Sommer’s April 17 New York Times article:
“The bad news has already been incorporated in stock, bond and commodity prices. The headlines about inflation have once again been awful… Stocks and bonds have been shaky since the start of the year, and the tragedies of the larger world are profound and proliferating, including a lingering pandemic and Russia’s assaults on Ukraine…
“This is all terrible. Yet precisely because so much awful news has already been incorporated in stock, bond and commodity prices, there is reason for suspecting that market conditions may not get much worse, and may even get better before long. When the consensus is this glum, it may be time for cautious optimism.”
Sommer’s timing is obviously terrible given the declines from last week, but his larger point may still be true, at least over some period of time.
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. And although the extent of the recent bond prices declines has been significant, these declines have historically been far less than those for stocks.
The financial media has most recently focused on the likely quickened pace of the US Federal Reserve raising the short-term interest rates it controls as the likely villain for declining longer-term bond prices set by the buyers and sellers in the bond market.
(Remember: bond prices decline when interest rates rise, and prices rise when rates decline).
This is happening currently, as ten-year US Treasury bond yields have increased rapidly from the year-end 2021 rate of 1.50% to the current rate of just under 3%.
Indeed, there is some current discussion of the Fed raising rates too high and too fast, giving rise to the next economic recession. Of course, this is all part of the unknown future.
As always, PPA encourages our clients to remember that declines do occur from time to time, in stocks and bonds, but that historically markets also recover. We will continue to provide historical context and help all our clients focus on specific long-term goals.