The new year is about three weeks old and there’s a lot going on in the market. It seems that no matter what is going on in the market, good or bad, there’s always a lot of noise and dire headlines in the media. But nothing cuts through the noise like data, so in this post we’re rounding up some of our favorite charts that we’ve come across over the last few weeks. They offer some key insights that can help you stay disciplined and drown out the noise in 2022.
How stocks have behaved since 1980
First, investors should understand that any given year is likely to have its ups and downs. In fact, since 1980, the S&P 500 has suffered an average intra-year decline of 14%. But even with such declines, the index has been higher 32 of the last 42 years (76% positive) with an annualized return of 12% over that time.
The S&P 500’s current high is 4,818. So it could fall to 4,143 at some point this year and still be right in line with average intra-year declines since 1980. If such a pullback does materialize, we believe it will represent a nice buying opportunity. Notice in the chart above that actual yearly returns (gray bars) have rarely been as bad as the actual intra-year pullback (1981, 2000, 2002, 2008 are the exceptions).
How stocks perform after the first rate hike
The Federal Reserve is expected to start raising interest rates later this quarter. They have kept rates at 0% since March 2020 in response to the Covid crisis. There is a lot of consternation over how the fed raising rates will impact the stock market. The chart below shows that the S&P 500 has, on average, performed pretty well following the first rate hike in the cycle:
The index was higher 12 months later 100% of the time with an average return of 10.80% and a median return of 5.60%. Granted, in the three months after the first rate hike, the market can be a little bumpy. So perhaps April-June will be a somewhat volatile period for stocks this year.
Speaking of interest rates, market expectations of what the fed will do continue to point towards more interest rate hikes than previously expected. One month ago, market forecasts called for three rate hikes during 2022. Today, current forecasts call for at least four, and momentum is building for five:
You can keep an eye on these expectations using the CME’s FedWatch tool.
How stocks perform during a mid-term year
2022 is also a mid-term election year. Since 1950, these mid-term years have seen larger than average intra-year pullbacks in the S&P 500. However, one year after these pullbacks the index has posted incredibly strong returns:
Here we see that, since 1950, the average pullback during a mid-term year is 17%, but the average one year return from the low of that pullback is 32%! This suggests that if we do get an uncomfortable pullback this year, it could be a tremendous buying opportunity.
How market performance is changing
For much of the last few years, growth stocks, like those in the technology sector, have out performed value stocks (think bank & energy stocks). However, so far in 2022 just the opposite has happened: value stocks are outperforming growth stocks.
The tech-heavy NASDAQ composite index is down more than 4% through the first two weeks of the year. Meanwhile, XLF and XLE, two ETFs that track the financial and energy sectors, are up 4.50% and 16% to start the year. The outperformance of growth stocks over the last few years is one of the reasons US stocks have outperformed non-US stocks over that same time.
US indexes are much more growth oriented than non-US indexes. (Apple, Microsoft, Google, Amazon are all growth stocks, and make up more than 10% of the S&P 500 index). The graph below from JP Morgan Asset Management helps put this into perspective:
Therefore, as the rotation from growth to value has started to play out, we’ve seen non-US stocks start to outperform US stocks. It’s possible that this rotation is being driven by the fact that non-US stocks are the cheapest they’ve been versus US stocks this century:
If the market continues to favor value stocks over growth stocks, then non-US stocks could be set up for outperformance versus their US counterparts. This also highlights why it is important to maintain a diversified portfolio.
What does January tell us about the rest of the year?
The S&P 500 declined 1.87% through the first five days of the year. When the index is negative through the first five days of the year, returns for that year are below average:
The data above looks at 1st five day returns since 1928 and finds that in the 63 years where there were positive first five day returns, the S&P 500 was up on the year 74.60% of the time with an average annual return of 11%. During negative sequences though, such as what 2022 started with, the year was up just 51.61% of the time with an average annual return of 1.77%.
In summary, these charts help illustrate a few key points:
- Any given year is going to include ups and downs. It would not be surprising at all to see the S&P 500 experience a 10% pullback this year after not experiencing one last year.
- The fed raising rates, and the market’s expectations of future rate hikes, is going to remain a key storyline that you will read about all year. But since 1980, none of these rate hike cycles have coincided with a disaster for the market.
- In the second half of the year, politics are going to come into focus. There’s no worse noise than political noise, so stay focused and remember that the S&P 500 has done really well following pullbacks during mid-term election years.
The bottom line is we are expecting more volatility in 2022 compared to 2021. We also think markets will behave differently than investors have been used to in the last few years (such as rotations from growth to value continuing). But through it all, we think the market stays steady on the back of a strong economy and that any meaningful pullback (10-20%) will represent a nice buying opportunity.
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