With the market now in correction territory, and continuing to slide, I wanted to send an email about our outlook. At the same time, I think is important to acknowledge the toll that is being taken on the people of Ukraine and Russia. We sincerely hope that casualties will be minimized and the conflict will be resolved quickly. I encourage each of you to look for opportunities to donate and support those who have been, and will inevitably be, displaced.
Returning to the markets, let's start with the big picture, since it is a rosier one. As of the close of markets yesterday, the one-year return for the S&P was still up nearly 9%, despite being down over 12% since the beginning of 2022. Since the market bottom in the beginning of the pandemic, the market is up over 80%. And, even measuring from the pre-pandemic highpoint, we have seen a 25% increase in the S&P 500 in just over two years. It has been a good time to be a stock investor.
In other positive news, Covid-19 numbers continue to decline and restrictions are being lifted. Over the past month, earnings reports from many of the largest companies have been positive and beat expectations. Based on a sample of over 700 companies reporting earnings in the past few weeks, 2/3rds have been positive relative to expectations. Of larger companies, with over $50bn in market cap, that same percentage grows to 80%. Some of the companies that significantly beat earnings expectations include Google's parent company Alphabet (>14.5%), Exxon (>4.5%), and AMD (>20%). UPS, T-Mobile, Amazon, Merck, Pfizer, Disney, Toyota, Cisco, AIG, Walmart, Deere, are some other household names that had strong earnings reports. Employment numbers also remain good, and inflation (as measured by core CPI, excluding food and energy) is moderate.
Much of this good news was "baked-in" before the end of 2021. So, let's look at what has happened over the last several weeks to create the weakness we are now seeing. The threat of war is obviously the big one. But, in addition, some of the same signals that reflect strength, are concerning to the stock market. The Fed has suggested they will begin raising rates again this year which will increase the cost of capital. Food and energy prices have soared as the supply chain has continued to struggle, driving inflationary concerns. (Compare the two lines in the chart above, and depending on which one you look at you get a very different inflation narrative.) Add to this that there are low unemployment numbers, and we have pressure to increase wages. While this can be seen as a positive by some, the market tends to interpret this as an earnings and inflation risk. Finally, a number of issues have contributed to a major correction in tech stocks. While the FAANG stocks initially were insulated from the early pull-back, as the drawdown extends to the larger companies in this sector it has an outsized impact on the indices.
It is a complex story to say the least, but as investors we are still left with the same options: buy, sell, or hold. At Open Door, we aim to put every investor in a position where they do not need to sell during a market dislocation. By having an emergency reserve, cash for upcoming distributions, and an allocation to bonds in the strategy, we are positioned to withstand a correction.
For conservative and moderate investors, therefore, we recommend they hold; maintain a diversified portfolio and rebalance only when we have gone beyond the tolerances established for the portfolio. For aggressive investors now could be a buying opportunity. While we do not know where the bottom of this market will be, there are significant discounts relative to where we were six months ago. As cash becomes available, consider deploying some of it toward your equity portfolio, and, in time, we believe the market could reward you for taking a risk during a moment of uncertainty.
As always, what is right for you depends on your specific facts and circumstances and any adjustments should be made only following a conversation with your financial advisor.
Wishing for peace and stability across the world.
-Open Door Financial
DISCLAIMER: Open Door Financial LLC is a registered investment advisor offering advisory services in the State of Minnesota and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendation made will be profitable or equal the performance noted in this publication.
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