Learning to Dance in the Rain

It’s been said that April showers bring May flowers. Despite having turned the calendar to May, given the recent volatility in equity markets, it feels like it’s still raining – hard. More than the fact that the S&P 500 has fallen more than 10% year-to-date, it’s been the way we’ve gotten there that has made the recent market storm so unsettling.

With seven of the past twelve trading days having market movements of more than +/- 2%, it’s the size of the recent storm that has caught investors off guard. To make matters worse, five of those days saw the market fall by more than 2.5% in a single trading day.1 Add in the fact that we are experiencing the worst bond market in 40 years, causing the normal shock absorbers for investors to feel as if they’re adding fuel to the fire rather than serving as brakes on exposure.

This recent market turmoil is certainly causing stomachs to churn, especially because it’s been a while since we’ve seen market storms of this magnitude.

The human tendency to favor or place greater importance on recent events over historic ones – known as recency or memory bias – can’t be understated when considering investor sentiment regarding the recent market storms. That is, we all tend to forget experiences of the past compared to more recent events.

Candidly, we haven’t seen any market storms recently. In a given year, the market averages about three 5% pullbacks and one 10% correction. In 2021 there wasn’t a single 10% correction and only one pullback of just 5.2%. For further perspective, last year’s 5.2% drawdown was the second smallest annual drawdown since 1995.2

Before the correction we experienced in March this year, the market’s last correction was at the onset of the pandemic in March 2020. That’s two full years between market corrections. And yet The VIX index, a volatility tracker that investors refer to as the “fear gauge” of the market, touched its highest level of fear since the height of uncertainty during the pandemic in 2020.

For most investors, the recent market volatility feels anything but normal given the long drought coming into 2022. Despite that feeling, investors would be advised to view the recent storms through a larger lens. On average since 1980, the stock market has suffered an intra-year decline each year of 14% – a number that often catches investors by surprise given long-term average equity returns of 8-10% per year.3 This year the S&P has suffered a 15% decline, in line with the market’s long-term average intra-year drawdown.

Historically, the stock market has had a positive return three out of every four years. The last three years have demonstrated that, with positive average returns of 26% per year. So, while we may be due for a down year, investors should remember the market drawdown to date happens every year on average at some point.

Keep in mind that the market faces a wall of worry to climb over every year with issues that stir investor anxiety. In 2022 those worries include elevated inflation, rising interest rates, the Fed’s actions, and the Russia/Ukraine war. Take hope in the fact that over the last three years we’ve climbed over other worries including tariffs and trade wars, a century-worst pandemic and economic shutdown, a polarizing U.S. presidential election, and inflation worries, and still saw average returns of 26% per year.4

As investors wait for the storm to subside, they shouldn’t lose sight of the positive market landscape that remains. Corporate earnings are expected to grow by 9% this year, in line with long-term market averages. Interest rates have moved abruptly higher in 2022 but remain below long-term averages. Job openings remain near record highs, signaling economic optimism from businesses. And consumers, who make up about 70% of U.S. GDP, are in a strong financial position with unemployment levels near pre-pandemic lows, household debt as a percentage of income at a 40-year low, and wage growth well above long-term averages.

Periods of market volatility can serve as a good reminder for investors to review their risk tolerance and the balance of stocks and bonds in their portfolios. Except for a few months in 2020, the market has been on a general upward climb since the depths of the Great Financial crisis in 2009. This trend of market success can cause all of us as investors to forget our real tolerance or comfort with market risk, making market declines even more painful.

Last year many investors expressed concern over putting new money to work as the market was hovering around all-time highs. With the market roughly 15% below its peak, now could be an opportune time in the middle of the market storm for long-term investors with money to invest. As Warren Buffett said, “Be fearful when others are greedy, and greedy when others are fearful.” Given the recent market storms, maybe his quote should have been about learning to dance in the rain.

1 www.investing.com
2 https://awealthofcommonsense.com/2022/01/this-is-normal/
3 J.P. Morgan Guide to the Markets
4 Morningstar

John is the Chief Investment Officer (CIO) at Mosaic Family Wealth. He leads the firm’s Investment Committee which shapes the firm’s investment philosophy and strategy for client portfolios. He also serves on Mosaic’s Leadership Team. A 20-year industry veteran, John is most passionate about helping people understand how emotions relating to investments can be more important than the investments themselves in achieving financial goals.


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