Updated: Apr 11
This article represents the opinion of the writer. As always, though, you should remember to consider every piece of investment information you receive. Realize not all investors are in the same situation and needs. If you require the service of a Financial Advisor, we recommend you seek out one and verify their experience.
Corrections are typically broad-based selloffs, and January is an official correction.
As of 1/24/2022, nearly 40% of the NASDAQ Composite Index (CCMP) stocks were down over 50% from their highs, and Russell 2000 Index (RTY) is down over 30% from its November high. It means about four in every ten companies on the NASDAQ Composite Index have seen their market values cut in half from their 52-week highs, while many stocks are in the bear market. In 2021, we saw a buying frenzy in electric vehicle-related companies, the rise of nonsensical cryptocurrencies, such as dogecoin, and technology innovation such as NFTs. Although inflation and supply chains were a known issue last year, many investors continue to trace the volatility and are not emotionally equipped to handle the stock market in the long term.
As nasty as the decline might seem when we look at broad indices, our portfolios significantly outperformed the NASDAQ market correction by 5% to 11% depending on your chosen risk model. Our portfolio is built for reliability in uncertain times (like right now).
Beginning this year, Fed Chair Jerome Powell announced potentially raising rates four times in 2022 beginning in March, with perhaps one (or more) of these being a 50-basis-point hike instead of 25 basis-points. It will give us only ten months to go from 0% or 0.25% bank rate to potentially 1.5% to 2% by the end of the year. Investors seem to realize that turbulence to get inflation down is not avoidable. However, I cannot call this current volatility a recession.
Let's look at the following facts:
Initial Jobless Claims dropped to 260K as of 1/17.
Consumers are in a strong cash position, especially in the United States, where over $2 trillion sits in checking accounts and other short‑term deposits. At some point, they will reenter the equity market. Who wants to make zero in the bank savings or 1.85% for a 10-year Treasury forever?
The expectation of higher prices is due to the existing chip shortage and further shipping disruptions caused by Omicron. It is not caused by decreasing consumer preferences, the anticipation of price reduction, or technology shift. In microeconomics theory, price changes due to quantity in supply. It doesn't change the market equilibrium until demand changes. Therefore, the current turmoil cannot be considered a permanent situation.
Total Q4 earnings for the 101 out of S&P 500 members that have reported results through 1/26/2022 are up +25.5% from the same period last year. It also equal 3.2% higher revenues, with 84.2% beating EPS estimates and 77.2% beating revenue estimates. It did not prove a clear indication that the economy is overheating. Below is a big picture view of earnings every quarter.
As you can see, the growth rate in 2022 is expected to be lower than 2021, but it is invalid to assume that the growth momentum will discontinue in 2022 or 2023.
You can see this the other way around; the risk lies in the net profit margin getting squeezed off due to the higher cost of labor, material, etc.
What about bonds?
Bonds do not appear to be cheaper than stocks. The yield spread between the ten years to 30 years Treasury is my concern. Look at the chart I drew below. I circled how the Treasury inflation protection bond is currently underperforming the ten-year Treasury. I also drew a white line chart to show you the apparent downtrend in both. We may see lower prices, at least in the short term. It might reverse in March when the Fed announces the first interest hike, but I will not try to time the Fed.
Use this environment as an opportunity to revisit your risk tolerance and portfolio allocation.
Here are the action plans of KW Wealth Management:
For portfolios with more than five years of investment time horizon and moderate aggressive risk tolerance, I am taking advantage of this year with a long-term view. I will add to the mega-cap stocks through the market pullback.
For portfolios requesting a monthly withdrawal and with less than five years of investment time horizon, I will reserve a minimum of 12-18 months of cash reserve. We will not trade out our high-quality stocks and put in cash or bonds.
For portfolios with more than five years of investment time horizons with a low to medium risk appetite, I will begin to trim the small-cap and mid-cap investments to reduce the standard deviation in the portfolios. Then, we will reinvest into mega-cap stocks and short-term bond indexes.
In my line of business, patience, discipline, experience, and knowledge is power. My view is that it is unwarranted to time the market or guess who goes in and out of Capitol Hill. We will stay invested and be conscious of moving around different asset allocations to protect, preserve, and grow our client’s wealth.
We are grateful to the people that have invested in us. Thanks for taking the time to read this article.
If you have any questions, feel free to contact us.
Past performance is not a guarantee of future results. KW Wealth Management does not guarantee any minimum level of investment performance or any index portfolio or investment strategy success.
All investment is subject to risk, including loss of principal. Investment in bonds is subject to interest rates, credit risks, purchasing power risks, reinvestment rate risks, and inflation risks. Investment in stocks is subject to country-specific, currency, business, financial, and market risks. Investors should carefully consider the investment objectives, risks, charges, and expenses of investing in funds and ETFs.
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