If you have friends from the 41st latitude, they will tell you there are two seasons—6 months of winter and 6 of tough sledding. That tough sledding part is what we are experiencing in financial markets in 2022. It will probably last through September.
After all, this is the mid-term election year. Investment history repeats itself with even higher probabilities than the weather. However, in the good old days, before Ph.D’s in Economics became even smarter in 2008, you could at least earn a few percent in the bank without the roller coaster ride. Thank you, Drs. Bernanke and Yellen! (Current Chair Jerome Powell has degrees in only politics and law–does he get a pass? He is just a follower.)
Through Monday, February 28, Mr. Market has made it clear he is not happy. He is not in favor of any of this Quantitative Tightening (QT). He loves Quantitative Easing (QE), the diet he has been on since the so-called Great Recession began in 2008. Everyone loves free money and the Federal Reserve Board (Fed) has created it from thin air for over 13 years now.
The Fed forced low prices for money (interest rates). This was no solution because the banks were prevented from lending money to anyone (small business owners) who needed it. The Billionaires grew richer during the Obama years because they could borrow and did, to gain even more market share. Result? The slowest economic recovery in US history.
Here is the bad news. In two months, the S&P 500 index has dropped 8.23, the Nasdaq 100 is down 12.76, and the Dow Jones 30 Industrials Index is lower by 6.73 percent. Bonds have no great help because new rates have risen until a couple weeks ago. In fact, the Barclays Aggregate Bond Index is 6 percent lower than it was on the last day of 2020. The CBOE 10 Year Treasury Yield Index is higher by over 21 percent through Monday. Oh, and then there is that pesky issue of inflation. Older Boomers should remember what fun the late 70’s were.
But good news lies in the fact that of thousands of parts of the financial markets are actually rising. They are primarily the investments that have been overshadowed for so many years by the big dogs that dominate the S&P 500. Imagine that you are able to hit your local garage sales and find company stocks selling at far less than retail.
As in the really great recession of 2000 through 2002, these companies will likely gain worth as the Facebook, Amazon, Apple, Netflix, and Google (FAANG) lose price until they are more appropriately valued.
The S&P 500 Pure Growth Index has lost 12 percent in January and February, but the S&P Pure Value Index lost only 3 percent. In total, both have lost some money in 2022. But would you rather own Bunge (BG) selling at 6 times its earnings, or Netflix (NFLX) selling for 52 times its earnings? The first has gained 12 percent while the latter has lost 35 percent through yesterday morning. BG also pays a 2 percent per year dividend while NFLX pays nothing.
If the war continues and the Fed vacillates on rate policy, you can still make money this year. In all likelihood, the fourth quarter will see its usual rebound and show a gain. But if you can get off the Growth horse before it finally experiences a resurrection of sorts, and to get on the Value horse, I believe you will likely be better off and you can sleep better.
If you pull your money from all investments, you may well sit in your non-earning cash for a decade or more, never knowing when it is safe to reenter the fray. The volatility is not your enemy, but the new trend is your friend. Inflation is more likely than recession. Now at least earning dividends from good value stocks will not help you buy your future groceries or gasoline.