Holiday Volatility: Markets Rattled by Omicron, Politics, and the Fed

Holiday Volatility: Markets Rattled by Omicron, Politics, and the Fed

Monday morning brought another wave of red to global equity markets. In the US, the S&P 500 is about 4% off its high, the Dow Jones is about 5% off, and the NASDAQ is about 7% off its all-time high. Small-cap stocks are nearly 13% off their early November highs. These drawdowns come as unwelcomed early holiday presents, given the epic run higher we’ve seen in equity markets since the initial pandemic recovery about 20 months ago. 

Areas of the market that have seen the most rampant speculation post-COVID have been the ones that have felt the most pain during the past several months. The chart below, from JPMorgan’s Michael Cembalest, illustrates just how hard some of the darlings from 2020 have been hit this year. This chart doesn’t include cryptocurrency assets either, as Bitcoin remains about 33% below its 2021 high according to Coinbase. 

For long-term and diversified investors, this may come as a relief of sorts. The US equity markets have largely been ignoring anything related to fundamentals or rational behavior. Companies with no revenues have seen multi-billion dollar valuations and companies that displayed financial resiliency have left shareholders largely unrewarded for their prudence. 

It's logical to see how the outsized market rally has been driven by extra money sloshing around the markets thanks to trillions in stimulus dollars from Congress and the Federal Reserve. Now, as the Fed winds down its supportive measures and additional fiscal stimulus becomes uncertain if not unlikely, the cracks are beginning to show. 

We expect continued volatility as markets digest risks and look into 2022, a year that’s likely to be marked by less easy money and more headwinds for epic rallies. It’s important to remember that the volatility we’ve seen this winter is normal. The 20 months preceding this weakness where stocks indiscriminately push higher was the abnormal period. This can be illustrated by the widely-referenced JPMorgan chart “Annual Returns and Intra-Year Declines.” Over the last 40 years, the S&P 500 falls an average of 14% during any given year. It’s largest decline in 2021 so far? 5%. 

As we put a wrap to 2021 and look to 2022, stay diversified across regions, size, and sectors. Focus on businesses that generate cash, have demonstrated success, and strong management. Avoid trying to chase the “next big thing” and don’t try to time these market movements. Losing less on the downside can be a bigger victory over time versus finding big winners that are susceptible to large corrections. Our three main investing principles ring especially true today: stay invested, diversification matters, and in the long run, markets persist. 

If you have any questions about your financial journey or wish to talk to someone about recent market volatility, don’t hesitate to reach out to our team. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.  Bonds are subject to market and interest rate risk if sold prior to maturity. Bonds are subject to availability and change in price. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.