Happy New Year to everyone. We hope your year has gotten off to a better start than the stock market.
Through the close on Wednesday, January 26, stocks were down roughly 9% for the year. Unless there is a strong rally on the final few days of the month, it will be the worst start to a new year since 2016. It has been worse for companies that trade on the Nasdaq exchange which tends to be more aggressive, technology stocks. That index is down over 13% in January with small-cap stocks down 12%. The intra-day volatility has been breathtaking as well. On Monday, the Dow Jones Industrial Average (which represents 30 of the largest companies in the U.S.) was down 900 points but finished the day up 100 points (a swing of 3% on the day).
Of course, there have been some pockets of relative strength this year. Value stocks, which includes financial companies (like banks) and energy companies, have done well. Many commodities have actually risen this year, including oil, natural gas, platinum, and palladium. Also, foreign stocks have held up relatively well this month.
Why are stocks down to start the year? There are a number of potential causes:
- Rising interest rates are probably a major culprit, fueled by rising inflation, as well as the tapering by the Federal Reserve (i.e., reducing the amount of bond purchases they had been doing since the pandemic first hit). Rising interest rates can often have a negative impact on higher flying growth stocks.
- Higher inflation impacts company profits, as well as spending by consumers.
- Rising tensions in Ukraine are creating uncertainty about possible military action.
Have any of the FSA Safety Nets® been tripped? Yes.
Below is a table with the current allocations for the seven broad strategies that FSA actively manages. At this point, it has primarily been the large-cap growth funds that we have sold, as well as several of the more narrow sector funds such as homebuilders and transportation. On the other hand, the value funds we hold have held up relatively well, as have the few international funds we own.
While our exit triggers are based on the performance of each holding, we are also looking at the behavior of the overall market. If the S&P 500 index can hold above the range of 4100-4200, we will likely maintain our current allocations. A break of the 4100 level by the S&P 500 index would, in all likelihood, lead to another round of selling to take the strategies completely out of the market. So, these next few days will be important for us to see if the worst is behind us or if there is another leg down.
Even if we have seen the worst of this correction, things may continue to be choppy for a while. While we can’t prevent small losses from happening (investing requires a willingness to take some amount of risk), the FSA Safety Net® can help make sure small losses don’t become devastating losses whenever the next bear market comes along.
Please call or email if you have any questions.
Investment MANAGEMENT TEAM
Disclosures are available at https://fsainvest.com/disclosures/market-update/.