What’s behind January’s market swoon?
The combination of higher interest rates, lackluster fourth-quarter earnings and geopolitical risks have taken a toll on the global equity market, with the selloff most pronounced in the United States. The S&P 500® Index is now down over 7% on the year, and at one point earlier today entered into a correction—defined as a selloff of 10% or more—for the first time since the COVID-19 lockdowns of early 2020. The benchmark U.S. equity index has since recouped all of today’s losses, but is still down nearly 400 points from its record high of 4,796 on Jan. 3.
How long do market corrections typically last?
While sharp selloffs can be nerve-wracking for investors, history can provide a useful ballast to our emotions. In this case, there are two key lessons from the past seven decades. First, corrections—such as what the S&P 500 fell into during intraday trading today before mounting a stunning rally—are totally normal. Market corrections tend to occur once every two years. And it is precisely because of this volatility and risk that equities—as an asset class—are expected to return more than bonds over the long-term. Second, equity market corrections have historically been short-lived, with the S&P 500 Index recapturing its previous highs in just four months, on average. Disclaimer: While past performance is not indicative of future results, we believe the buy low, sell high mantra is a superior strategy for those investors that are able and willing to deploy capital when others are fearful.
What’s driving the market selloff?
With that as context, let’s deconstruct the current market selloff. Fading concerns over the severity of the omicron variant of COVID-19 and the U.S. Federal Reserve’s hawkish pivot—possibly pulling the first rate hike forward into early 2022—caused a repricing in fixed income markets, with the 10-year Treasury yield rising from 1.4% in late December to 1.7% in late January. These higher discount rates catalyzed a repricing of unprofitable growth stocks whose valuations hinge heavily on earnings that are expected far off in the future. The early innings of the fourth-quarter earnings season fanned concerns within the growth segment of the market as guidance from some management teams, such as Netflix, came in sharply below analyst expectations. Many of these unprofitable growth securities are now trading down more than 20 or 30% in the current selloff.
Why we prefer value stocks today
Our preference coming into 2022 was to maintain a valuation discipline in portfolios. We observed a historically wide discount for value equities and thought these securities—which behave more cyclically—were poised to do well in the current macroeconomic environment. Fortunately, this valuation discipline has contributed to strong benchmark relative performance across our flagship multi-asset, equity and OCIO offerings during the current bout of market volatility.
Is there a buying opportunity amid the selloff?
Going forward, we will continue to evaluate potential market opportunities through the lens of our cycle, valuation and sentiment (CVS) decision-making process. Strong household and corporate balance sheets leave us positive on the ability of the U.S. and global cycle to deliver significantly above-trend economic growth in 2022. Meanwhile, investor sentiment has pivoted hard through the current selloff and is approaching panicked levels. We view that as a positive indication, tactically, for the performance of risky assets. Finally, as the business cycle matures and the relative valuation spreads between value and growth stocks narrows, we have an eye toward gradually trimming style tilts in portfolios as they perform.