The stock markets saw a pretty important drop with a lot of gloomy media coverage in January. The reality is this kind of high volatility is expected in the current economic environment. It is something we’ve seen many times before, especially in situations of increasing interest rates. Today, we are going to take the opportunity to provide you with some context on the volatility. So, what has caused the market correction, and when will it end?
Uncertainties about the trajectory of interest rates, inflation and the potential for geopolitical conflicts, like tensions between NATO & Russia, have led the markets to drop from their highs.
Although no one has the ability to know when this stock market correction will end or even whether 2022 will finish on a negative or positive note, the chart from JP Morgan Asset Management shows the returns for the US stock market each year from 1980 to 2021 and the maximum drops throughout those individual years. You’ll note that significant decreases are not necessarily good indicators of how the rest of the year will turn out.
For example, as recently as 2020, there was a decline of -34% – as you will remember- during the year, but it ended with a positive 16% return.
Or even in January 2016, where in the same month, we experienced an 11% drop, and the year ended at +10%. So, drawdowns in the market are pretty common.
As our Chart of the Month video from July 2020 explains, a 10% pullback occurs roughly every year, while a 15% correction occurs on average every two years.
Timing these events is impossible. However, like in the past, we are finding opportunities to take advantage of these pullbacks.
Our TWM portfolios are designed with diversification and resilience in mind.
With a mix of an Equity, Defensive and Alternative sleeve.
- When it comes to the Equity sleeve, unfortunately, there is no free lunch, volatility is the price of admission for inflation-beating returns, and a more long-term approach is required.
- The Defensive sleeve, as its name suggests, provides a steady income stream regardless of fluctuations, which is where we will draw capital if needed in this volatility.
- And the Alternative sleeve provides consistent performance while benefiting from low correlation to the other segments.
The last two segments, Defensive and Alternative, as expected, have proven stable in the month of January.
The Key Takeaway?
While always unpleasant, market pullbacks are part of typical market behaviour, and one might even say that this recent one was overdue.
Remember, emotions and biases drive short-term returns, but companies’ fundamentals drive long-term results.
We’ll continue to focus on companies that are delivering value over time. Or in other words, it’s not about timing the market; it’s time in the market.
We are more than happy to answer any additional questions you may have. On behalf of TWM, thank you and have a great week.
