2022 got off to a rough start in Q1 as Russia’s invasion of Ukraine rattled governments and financial markets alike. Supply chains that were already stretched to their limits by the Covid pandemic have been further strained by sanctions enacted by many western countries as a protest to the Russian aggression. Commodity prices and interest rates were up however, indicative of the inflationary pressures being felt worldwide and maybe most clearly indicated by the price of oil which is now over $100 per barrel.
In February, the US Consumer Price Index (CPI) jumped to 7.9% year-over-year, its highest reading in 39 years, and the unemployment rate fell to 3.6%. The tight labor market and persistent inflationary pressures pushed the Federal Reserve to raise the federal funds rate target range by 25 basis points, to a range of 0.25% to 0.50% at their March Federal Open Market Committee (FOMC) meeting. This is the first Fed rate hike since the end of 2018. In addition, the committee announced that they expect to begin quantitative tightening by reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.
Recently, I saw a provocative headline about an investment advisor that is predicting a 40% correction coming soon to blue chip stocks, with up to a 90% selloff before a new bull market begins. The story gave him credit for supposedly previously predicting Japan’s long bear market, the dot.com bubble bursting, and even Donald Trump’s ascension to power. When I searched the advisor’s name, however, I saw that he has made similar predictions many times in the past. This reminded me of a quote from former Fidelity Investments fund manager, Peter Lynch.
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch
Nearly 30 years of personal experience has led me to a similar opinion about trying to time the market. In fact, I didn’t have to look far to find another prediction by the same advisor to reinforce this perspective. In December 2016, he warned of a 17,000 point drop (@90%) in the Dow Jones Industrial Average. In the interest of science, I modeled a hypothetical investment in the SPDR® Dow Jones Industrial Avg ETF around the time of that prediction (from 12/1/16 through 3/31/2022). An investor would have had a total return of 102.44% over that period with the largest drawdown (loss) being -36.7% during a 40 day period in 2020 when the world was first entering the Covid 19 Pandemic.
An investor that ignored his doom and gloom prognostications in 2016 (and stayed the course in 2020) would have more than doubled their original investment. However, one that heeded his warning and stuffed their funds into a mattress to await Armageddon would have seen inflation reduce the purchasing power of their cash by 19.12% (per the Consumer Price Index) over the same timeframe. Score another loss for market timing.
Okay, enough with predictions, here’s what happened in Q1.
Q1 reinforced the importance of having a long-term plan. Staying invested through turmoil is often easier said than done but understanding how volatility is likely to influence your plan’s success can go a long way towards managing our emotions.
With any market condition, a sound plan makes the ups and downs much more manageable. Get in touch to review your plan.