In recent years, investors have grown accustomed to market downturns that have been short-lived. We’ve seen sharp declines followed by fast recoveries. We saw this in the last quarter of 2018 (left side of the S&P 500 chart below) and at the onset of the COVID pandemic in early 2020 (middle of the chart). But what investors are experiencing now is different (right side of the chart).
After the bounce-back in March, it seemed that the equity markets were poised to repeat their typical trajectory of a quick correction and subsequent quick recovery. But April threw investors a curveball with the equity markets rolling back over, turning this correction into a more prolonged, choppy downturn. The first four months of 2022 have been the worst start to the year for the S&P since 1939.
In our last market update, Ron Rough referred to the S&P 500 moving around a trend line. He described how FSA’s approach is to be invested in equities when the markets are above the trend line and to move to cash when the markets are below their trend line. At the end of March, the S&P 500 was simply bouncing up and down right around its trendline, and it remained to be seen whether stocks would hold the uptrend or roll over again. Then April happened, and by the end of the month, the markets had decidedly moved to the downside. Lingering worries over rising interest rates, inflation, global tensions, and COVID continue to create headwinds, and weak earnings guidance from some technology companies in April added to growth concerns.
By all accounts, April was a gut-wrenching month. The S&P 500 was down over 8%, its worst month since the COVID correction in March of 2020. The Nasdaq took it even harder, down over 13%, its worst month since October 2008 during the financial crisis. Bonds fared better than stocks, but even they were down over 3% during the month of April. Outside of commodities, there really was no place to hide.
Coming into April, the portfolios already had elevated cash levels since the S&P 500 Index had broken below its trend line earlier in the year. During the month of April, we further reduced equity exposure or added an inverse equity position. In other cases, we shifted from broad equity exposure to funds that are designed to manage risk and hold up better in choppy markets. Finally, we sold out of our high yield corporate bond positions since they were getting hit right along with stocks.
The table below shows how the strategies were allocated by the end of April. Two points to keep in mind: 1) A portion of the allocation to stocks includes funds that manage risk and tend to hold up better in choppy markets, as well as large cap value funds which have held up better than the broad market, and 2) some strategies hold an inverse equity position which reduces the long exposure to stocks.
What have we done in early May?
The last day of April was particularly brutal for stocks, triggering more of the FSA Safety Nets®. In early May, we sold out of stocks completely in the Income & Growth strategy and further reduced equity exposure in our other strategies. Rest assured that we will respond accordingly to any further weakness in the equity markets as we move through May. If, instead, the markets stabilize and begin to recover, we will be prudent in deciding when and how to reinvest the cash.
Enjoy the upcoming warmer season!
Mary Ann Drucker
ASSISTANT PORTFOLIO MANAGER
Disclosures are available at https://fsainvest.com/disclosures/market-update/.