New Era for the Stock Market

Market Update

February 28, 2022

“No living investor has experienced a global pandemic or the extraordinary monetary and fiscal policies that have been deployed to keep economies afloat. Without a playbook in hand, investors should beware of assuming that trends in recent years will repeat in the future.”
– Chris Hogbin, Alliance Bernstein

The stock market rose to historic levels in 2021. By some counts, as many as 70 record highs were recorded during the year. Buoyed by rock bottom interest rates (making it cheap for companies to buy their own stock), low inflation, trillions of dollars in stimulus money, and millions of risk-taking new investors, stock prices were propelled upward.

That all has ended abruptly as stocks have moved steadily downward during the first two months of 2022. Through February 23, the S&P 500 Index is down –11.3% and the technology heavy NASDAQ Index has declined –17.7%. These drops have largely eliminated the gains from 2021.

S & P 500 YTD (1/1/2022 – 2/23/2022)

S & P 500 1-Yr (2/23/2021 – 2/23/2022)

Why the about face?

• Instability created by Russia’s invasion of Ukraine
• Dramatically rising inflation
• Imminent increases in interest rates
• The end of stimulus checks
• The unjustifiably high stock market

Investment markets have been propped up by the government keeping interest rates artificially low and distributing trillions of dollars in stimulus money. Now those supports have been replaced by headwinds of inflation and rising interest rates.

The Federal Reserve board, which sets interest rates, has stated that they will be raising interest rates to get inflation under control. But theirs is a tough job. They must increase interest rates enough to rein in inflation but not so much that it creates a recession and job losses. It is unclear if they will be successful.

JourneyTree has been concerned for some time about the overextended stock market and, to be protective, has had an extremely low allocation to US stocks. That and other cautious strategies have contributed to typical portfolios declining just around –3% compared to double digit losses for the major indices through February 23.

Given the unusual level of uncertainty regarding the economy and geopolitical events we feel there is a high likelihood of continued volatility in 2022. We will continue to monitor conditions and look forward to having the opportunity to purchase more attractive investments as the year unfolds.