The Next Seventeen

By Michael Kayes, CFA Charterholder

When I was a young boy learning how to play golf, my dad gave me a tip that guided me through my high school and college career. During a tournament round in which he was my caddie, he watched silently as I triple-bogeyed the first hole. Walking to the next tee, he said, “It doesn’t matter what you did on the first hole, it matters what you do on the next seventeen.” How true that turned out to be.

I was reminded of that lesson watching the stock market fall not only in the first month of the year, but in the second also. I thought it was time to pull out The Yearbook – the 2021 SBBI Yearbook to be precise. Produced by Roger G. Ibbotson and Duff & Phelps, this annual publication provides U.S. Capital Markets performance by asset class going back as far as 1926. In short, it is akin to the bible for investment professionals.

Following the data… Since 1926 there have been 19 years (out of 96) where the stock market has dropped in January and February. In essence, it happens about 20% of the time, historically.

Those years were:

1928, 1935, 1948, 1953, 1957, 1969, 1973, 1974, 1977, 1978, 1982, 1984, 2000, 2002, 2003, 2008, 2009, 2016, and 2020. (Data is for large cap stocks)

Even more interesting (perhaps just to me), in 10 out of those 19 occurrences the stock market ended the year higher with the average annual gain equal to 21.7%. Rather impressive given the first two months produced negative returns. In the 9 years in which the stock market closed down, the average was -15.2%.

Based on the data, the first two-month correction in stocks could be the precursor to a powerful rally at some point later this year. Or it could be a harbinger of a particularly difficult year for the overall stock market. That’s not really much help, is it? And that, like my dad’s golf advice, is the point that investors should consider, in my opinion. There is a lot of work yet to be done this year that will ultimately determine investment returns for 2022, for both the equity and fixed income markets.

Potential positive catalysts for the equity market…

1. A drop in inflation due to a recovery in the logistical challenges coming out of the pandemic.
2. A drop in inflation due to effective and timely Fed monetary policy.
3. A combination of continued strong earnings and more attractive valuations.
4. Divided government after the interim election.
5. De-escalation of the conflict in Ukraine.

Potential negative catalysts for the equity market…

1. An escalation in geopolitical tensions in Ukraine.
2. An escalation in geopolitical issues in and around China.
3. Change of leadership in the White House.
4. The Fed raises interest rates too quickly and causes a recession.
5. The Fed raises interest rates too slowly and inflation worsens.

These are some of the most important issues we are currently monitoring. There are likely to be others as the year unfolds. In my opinion, there isn’t much value in attempting to assign probability to any of these potential catalysts, positive or negative. They are just too unpredictable. Despite that, I do believe earnings should continue to advance at a reasonable rate. I also expect divided government will be the likely result of the interim election. At the same time, I have very little confidence in the Fed executing effective and timely monetary policy. Their track record is not impressive. Unfortunately, I also have very little confidence that the current administration has the diplomatic skill to diffuse the situation in Ukraine. I hope I am wrong.

Therefore, it makes sense to me to approach the next tee, so to speak, with the following mindset. First, 2022 is likely to be a volatile year, with geopolitical events and erratic Fed monetary policy causing corrections as well as rallies. Second, it will be critical to nail company fundamentals and have an accurate assessment of valuation ranges for individual stocks. Third, it will require patience and discipline to take advantage of market opportunities.

The first two months do not a year make. But it is perhaps, time to focus on the task at hand, while disregarding insignificant soundbites, and avoid overreacting to short-term setbacks.

There are a lot of holes left to play. In the meantime, it might make sense to pray for wisdom and moral strength for our world leaders, and also lift up those in harm’s way today and in the future.

Michael Kayes, CFA Charterholder

Source: Ibbotson, Roger G.  2021 SBBI Yearbook. Hoboken, NJ. John Wiley & Sons, Inc. 2021

PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971

Share this...

Facebook

Pinterest

Twitter

Linkedin