Market Commentary - Q1 2022

04/15/22 | Birchbrook Team | Quarterlies

Below is an excerpt containing this quarter's market commentary. To download a copy of our full quarterly newsletter, click the Download Article link.

In Echoes from Hospital and White House, author Anna L. Boyden recounts a story told by Rebecca Pomroy, an army nurse who served at the White House in 1862. Pomroy joined the White House just after President Abraham Lincoln’s third son, Willie, died from typhoid fever, and she helped nurse the President’s wife, Mary Todd Lincoln, and his youngest son, Tad, back to health. During her tenure, nurse Pomroy developed a close relationship with the Lincolns, leading the President to call her “one of the best women I ever knew.”

In the story, President Lincoln and Mrs. Pomroy are riding together in a carriage when the carriage suddenly gets stuck in the mud. The President, wasting no time, gets out of the carriage, rolls up his pants, and finds three large stones, which he places in a row between the carriage and the dry sidewalk. Taking Mrs. Pomroy’s hand and directing her to the stones, Lincoln is credited with saying, “All through life, be sure and put your feet in the right place, and then stand firm.”

We are reminded of this story when thinking about the past few months. It goes without saying that the world has been volatile of late. The ongoing war in Ukraine has weighed heavily on everyone’s mind, and, in addition to the horrors we’ve all seen in the news, the fighting has exacerbated supply chain problems and inflationary pressures that were already an issue. Stock markets, which started the quarter on shaky footing, predictably dropped once Russian troops crossed over the Ukrainian border. At the same time, those looking for help from bond markets were let down, as bonds declined on fears of interest rate increases.

When the world is all topsy-turvy, it is a natural human reaction to want to do something, anything, particularly when people, including ourselves, are hurting. The act of doing something provides the illusion that we are not powerless against forces greater than ourselves, that we have agency and an ability to steer our own futures. But all too often, particularly when it comes to investing, doing anything can be worse than doing nothing. As humans, we are too easily swayed by emotions, and choices based on emotion tend to be irrational and reactionary. Warren Buffet once said, “The stock market is a device for transferring money from the impatient to the patient.” If you’ve built your investment portfolio on a solid foundation, it is often best to trust in that foundation and stand firm in the face of fear, uncertainty, and doubt.

The stock market illustrated this point throughout the quarter. On March 14th, two and a half weeks after the onset of the Russian invasion, the NASDAQ Composite Index reached a 52-week low of 12,555.35. This represented a drop of 22.6% from the index’s all-time high reached on November 15, 2021, meeting the technical definition of a bear market. A week earlier, the S&P 500 Index had already reached a near-term low of 4,170.70, or a 13.4% drop, meeting the technical definition of a correction. Thinking back to that time, investors had myriad reasons to sell risk assets like equities. The war was getting worse, inflation was raging, interest rates were rising, economic growth was teetering, and on and on. A natural reaction would have been to sell.

However, even though these same concerns persist today, the stock market has rallied strongly since March 14th, showing considerable resilience. As of yesterday’s close (April 4th), the NASDAQ was down 10.4% from its all-time highs and the S&P 500 was off just 4.9%. Put another way, in three weeks the NASDAQ rallied 15.7% and the S&P 500 9.8%. We don’t highlight this fact because we’re giving the all-clear. We aren’t. As a country and as a world, we face very real problems that could lead to significant price declines in the coming months and years. However, the past quarter serves as a reminder that trying to time the market is often worse than simply standing firm and riding things out.

That said, even though short-term market timing should be avoided, there can be times when it makes sense to adjust one’s long-term, strategic risk allocation. When might this be appropriate? The answer, again, comes down to your financial foundation, which ties back into your risk tolerance. Risk tolerance is a function of both your ability to take risk and your willingness to take risk. Your ability to take risk depends on your time horizon and the size of your assets relative to your cash needs. Your willingness to take risk is all about your capacity to stomach the ups and downs (really just the downs) in your portfolio.

Because markets are volatile and stocks could become weak again, now is the time to be sure your financial foundation, your asset allocation, is where it should be. If you’ve recently undergone a change in life circumstance that will require a greater cash outlay than you were expecting, or sooner than you were expecting, then we should discuss whether a reduction in your risk allocation might be appropriate. Similarly, if the volatility of the past few months has left you concerned or uncomfortable, then we should talk. For all the challenges at present, one blessing has been the stock market’s resiliency. Investors have been given a bit of a reprieve, an opportunity to reassess their risk tolerance and reduce their risk allocation if appropriate. By the same measure, because bonds are cheaper than they have been in years, any rotation from stocks into bonds is more attractive than it has been in some time.

To be clear, we are not advocating for a reduction in risk across the board. For all the scary news out there, we remain in the early innings of the Fed’s rate hike cycle. If past is prologue, it can take a year or more before higher interest rates put a dent into economic growth. Still, we recognize that for some people, a reduction in risk might be the best step, and now is a reasonable time to explore that option. Ultimately, our goal is to help you walk over (not through) the mud, and to help you find sure footing on the other side. For some of us, our current foundation is already appropriate. For others, we might need to adjust the stones a bit.

Until next time, may you find peace and happiness, and may the people of Ukraine find peace as well.