Call it the perfect storm of negative financial forces if you would like, but regardless of the description used, the economic and investment market events of the first quarter of 2022 have left many investors fumbling for answers. Consider the following data observations and the impact each has on the other factors.
In March the Labor Department announced that inflation, as measured by the consumer-price-index, reached a 40-year high as it hit a year-over-year rate of 8.5%. Adding to the inflationary economic woes of the past few quarters, equity markets experienced significant negative returns. The S&P 500 index lost 4.6% of its value in the first quarter but was far from the worst-performing equity index for the quarter. The Russell 2000 index, a broad measure of predominantly small-cap domestic equities, lost 7.53% in the first quarter, while the technology-stock-heavy NASDAQ index lost 8.9%.
The news was not any better for fixed income investments, the traditional refuge for risk-averse investors. Bonds experienced their worst drubbing in four decades as the Bloomberg Government bond index lost 5.5% in the first quarter, its worst quarter since 1980. The near-term outlook for bond returns is not any more favorable than the first quarter’s dismal performance. The Federal Reserve raised interest rates 0.25% in March in an effort to tame high inflationary pressures facing the economy. The March rate hike is the first of six additional anticipated rate hikes of 2022, and the Federal Reserve is even exploring 0.50% rate hikes instead of its preferred 0.25% increments. When interest rates rise, the price of existing bonds moves in the opposite direction which means we are very likely to see more severe price declines for bonds in the coming quarters of 2022.
Investment Decisions for the Months Ahead
Making investment decisions during market downturns is never an easy task. The number of expected market and economic headwinds investors face in 2022 makes investing decisions even more daunting than usual. Let’s explore decisions related to equity markets first.
For investors in the wealth accumulation phase of their lives recent equity market corrections offer a great opportunity to purchase equities at a discount from prices at the beginning of the year. Investors who are regularly investing in retirement plans like SIMPLE IRAs, 401(k)s, and contributory IRAs can take advantage of market downturns with a strategy known as dollar cost averaging. With regular contribution amounts, investors buy more shares of the same equities when prices go down, and fewer shares when prices go up. It should be noted that equities are the only asset class that offer a consistent hedge against the ravages of inflation on an investor’s purchasing power.
Investors approaching retirement, or who are already in the wealth preservation (retirement) phase of their lives may face more difficult decisions concerning equities. Investors making regular contributions to retirement plans can benefit from dollar cost averaging as described above. Investors who are already retired and not making ongoing contributions will need to be more judicious about when to make equity purchases because we do not have any reliable indications for how much further equity prices will drop or how long equity markets will remain in correction territory.
Investors face a much easier decision as it pertains to fixed income markets. We can pretty confidently assume that the Federal Reserve is going to aggressively raise rates throughout 2022 to try to reign in high inflation. Knowing that bonds will likely lose some value (even the very short-term bond portfolios we have been recommending in anticipation of the events of 2022 will lose some value), the safer strategy is to wait until all or most of the rate hikes have occurred before investing further into bonds. This may mean sitting on cash in some investment and retirement accounts for a longer period of time than we would typically advocate, but in this case the patience exhibited by bond investors today will pay off in the not-too-distant future
Other Financial Moves to Consider
We can expect other types of debt to exhibit similar rate increases in the coming months. Borrowers dealing with credit card debt, holders of student loan debt, and consumers planning to finance the purchase of new or used vehicles (when they can be found) would be well-advised to obtain their loans sooner than later, while borrowing costs are still significantly lower.
It is important to remember that the general financial advice provided in this article is not a substitute for a personalized financial plan. To ensure that you are best positioned to navigate the challenges of 2022 and beyond please contact us to schedule time to review your situation, financial goals and the components of your financial plan.