After such a calm year, 2022 has been a rude awakening. It has been a rough start to the year. While the month isn’t over, January 2022 is shaping up to be one of the worst months we’ve had in the markets for a while. Currently, the S&P 500 is down 10% from the highs, what market technicians call a “correction”. Whatever you call it, it’s the most significant decline since the craziness of March 2020.
This recent spike in “volatility” has shaken some investors. It’s no surprise. Last year we did not see more than a 5% decline. That’s quite rare, given 95% of the time, stocks have seen a loss of at least 5% in any given year1. In fact, stocks have fallen at least 10% in the greater majority of years. So maybe the market is just catching its breath after an unusually tranquil 2021.
The reason for the current sell-off has been attributed to rising inflation and the upcoming interest rate hikes from the Fed. As my colleague Andrew mentioned last week, when interest rates rise, it is more expensive for companies to operate. But the Fed tends to raise rates only when the economy is going well. Historically, the stock market has fared exceptionally well when the Fed has raised rates. In almost every period when the Fed raised rates, the S&P 500 had a positive year. Outside of ‘72-’74, the stock market has handled higher interest rates quite well (see image below). (What happened in 1973-74? We had an oil crisis, the collapse of the Bretton Woods agreements that led to a dramatic devaluation of the US Dollar.)
We think that the current pullback in the market is only a short-term hiccup in an otherwise longer-term global economic recovery. America has been lucky our economy rebounded so sharply last year. Countries like Germany and Japan are still playing catch up; their economies should accelerate this year, not slow down. In a recent survey, global CEOs were the most optimistic in ten years2. These industry leaders have a different perspective on the economy than the typical person. Their views on their various businesses can be an important indication of where they expect hiring, inflation, and capital expenditures will go.
Their sentiment is backed up by the data. One of our favorite gauges of the future of the economy continues to be America’s LEI or the “Leading Economic Indicators”. This collection of data looks at future demand and has been tremendously reliable. Whenever the LEI has turned negative, it usually indicates a recession is around the corner (see red shaded area below). Currently, the LEI continues to be quite steady, despite the recent COVID wave3. As you can see, the LEI index is at some of the highest levels in the past few years.
Advisory services offered by Apriem Advisors (“Apriem”), a registered investment adviser with the United States Securities and Exchange Commission in accordance with the Investment Advisers Act of 1940. Any reference to or use of the terms “registered investment adviser” or “registered,” does not imply that Apriem Advisors or any person associated with Apriem Advisors has achieved a certain level of skill or training. Apriem Advisors may only transact business or render personalized investment advice in those states and international jurisdictions where we are registered, notice filed, or where we qualify for an exemption or exclusion from registration requirements. For complete information about our firm, please refer to our Form ADV Part 2A, 2B and CRS at any time.
All charts and data from Bloomberg unless otherwise indicated.
The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. Past performance is no guarantee of future results. The reader should not assume that investments in the securities identified were or will be profitable.
Copyright © 2022 Apriem Advisors, All rights reserved.