Given the continuation of S&P 500 stock price declines in 2022, which briefly touched a new “bear market” on May 20, 2022, we are sharing another set of our Special Comments.
As the financial media has been emphasizing recently, bear market means a decline of 20% or more from a previous high.
While infrequent, these substantial down markets do happen; since the 1970s, there have been five such down markets before 2022, with declines averaging close to 40% and lasting approximately 1.5 years.
Remember, history is only a reflection of what has happened; it may not be repeated in the future.
Of course, the most recent three full years of stock market results, from 2019 through 2021, were very rewarding, as the S&P 500 rose from 2,507 to 4,766, a gain of just short of 100%. (This is inclusive of a tumultuous period, with the pandemic and the 2020 election and its aftermath.)
Measuring from the same 2,507 starting point, the May 20, 2022, figure of 3,901 still leaves a 56% gain over three years and nearly five months.
Further, stock prices did reach very high levels in 2021 relative to Price/Earnings ratios (almost 25, compared to the historic norm of 15-18), as the stock market presented almost the only opportunity for portfolio gains in a financial market environment in which interest rates reached historic lows following the pandemic.
Since increasing interest rates are cited as a major factor for stock declines, and typically lead to declining bond prices in the short term, it is worth noting that bond yields (i.e., interest rates) have stabilized for the most recent ten days. The 10-year Treasury yield is lower than at the end of April, after peaking at 3.13% in early May.
While we have no doubt there are real economic issues for the financial markets to deal with, perhaps some of this volatility is caused by traders and gamblers seeking to benefit from each day’s back and forth activity. They are not long-term investors looking to benefit from the long-term economic growth represented by stocks.
In sum, there is no telling how long current declines are likely to continue. Prices reflect all current and anticipated bad news, making accurate predictions a seemingly impossible task.
Our advice remains to rely on your previously established allocation of stock and bonds, unless your goals, time horizon, or risk tolerance have changed. In that case, a conversation with your Park Piedmont advisor is appropriate.