Understanding Early-2022 Market Uncertainty … and 3 Strategies to Manage Volatility
By Chris Hostetler
Wow, are the markets off to a volatile start in 2022! As I write this, the market is extremely close to being in “correction” territory.
At Hilltop, we are currently in the middle of our quarterly investment review, which came at a good time with the markets being so choppy. Last week was our high-level (“macro”) overview, and this week is about fund research. Hilltop will share our quarterly outlook video in a few weeks. But with the daily fluctuations being as wild as they are, we wanted to share a sneak preview and three strategies to beat market volatility.
The underlying economic situation appears to indicate continued growth in 2022, with generally high employment levels, rising wages, and growing consumer demand in a post-COVID environment.
With that economic outlook, our sense is that the investment markets are likely to continue growing this year but probably at a slower rate and with more volatility than in 2021. Last year’s highly accommodative Federal Reserve policy meant that there was a lot of cash on the sidelines; every time the market lost 5-10% of value, investors used that cash to “buy the dip”. Each time that happened, it pushed prices back up and the climb continued. Accommodative Fed policy is also one of the primary causes of the inflation we’re seeing.
Because the Fed doesn’t want inflation to get out of hand, they will certainly be looking to tighten the monetary supply, first by halting bond purchases and then raising interest rates. The market volatility stems from questions about just how fast the Fed will tighten.
Whenever the Fed does tighten, there will be less cash available in the economic system to soften the blow of negative economic news. We expect the Fed will do everything they can to telegraph their movements and avoid shocking the system. Still, with any announcement of tightening – and even when investors expect the Fed will announce – markets tend to drop. Of course, the Fed is not the only factor; we’ve also seen jitters related to omicron, Ukraine, inflation, supply chains, and other issues. We believe that’s a primary factor in the share price drops of early 2022.
What can you do to minimize investment losses? Most of that work should happen before volatility spikes.
As advisors, we help our clients focus on these 3 strategies to beat volatility:
Ensure you have a strong cash reserve – when returns are high, sell portions of your winning investments to create a robust cash reserve. Be prepared to fund your cash needs through the next bout of volatility, which could always be right around the corner.
Avoid making big bets – even when you’re pretty optimistic about stock market growth, make sure your portfolio is diversified and includes a healthy mix of safer investments, such as bonds.
Manage expectations – never should you assume the stock market is going to continue providing returns like the 25%+ that the S&P 500 index realized last year.
We would not want to sell funds just because the market is dropping. It’s nigh impossible to predict when the rubber band will snap and prices start recovering again. This Monday (Jan 24) was a great example of that: the S&P 500 began the day at 4396 and then dropped to 4239 by lunchtime, a 3.5% drop. From there, we saw an equally sudden rebound, and the S&P finished the day higher than it started, ending at 4413. The next day saw a similar drop and rebound. This can happen with longer-term trends, too – we saw it in 2008 and 2020. This is why it is so perilous trying to make big bets in the middle of a major market swing. The timing just can’t be predicted.
If you would like to review your plan and find out how prepared you are for the next round of market volatility, please talk to us.
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
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