Market Commentary for Q1: What Every Investor Needs to Know
If you’re concerned about your investments and the current market conditions for early 2022, you aren’t alone. The best way to avoid making costly financial mistakes is to understand what’s going on and the underlying factors at play.
In this post (and video below), we hope to put things in perspective with our market commentary for Q1.
Before we dive in, let’s back it up and look at Q4 2021.
Q4 was pretty extraordinary – with the S&P 500 finishing Q4 up 11% despite learning about the new variant and concern with the Fed raising interest rates.
When the Federal Open Market Committee (FOMC) meeting minutes came out, some people deemed the Fed more hawkish than the meeting itself – the concern was the Fed might raise interest rates faster and more times over the next year or two.
This concern caused the market to come off in terms of valuation. Generally speaking, higher interest rates mean lower valuations over time.
That being said, higher interest rates and inflation are typically not harmful to the stock market over time – until they reach a level that starts to affect economic activity.
But we are not seeing that right now.
The economy still looks strong. Corporate earnings growth still looks strong as well.
The broader concern is not the S&P 500 or the Dow Jones where you have older, more cyclical stocks encompassed in those indices.
The bigger concern is growth.
When interest rates go up, companies that are priced based on future revenue growth have to discount that earnings growth back in today’s dollars at higher interest rates, which typically means that valuations have to come down.
If a company’s earnings are growing dramatically, then they grow into that lower valuation.
In other words, lower valuation does not necessarily have to mean lower prices over time.
If you are invested for more moderate or aggressive growth, you are going to have occasional drawdowns and underperformance.
However, longer term, it has been proven historically that if you take more risk, you typically receive bigger returns over time.
Check out the video as Mark Sorensen, our Chief Investment Officer, provides a deep dive into Q1 and explains what you need to be aware of in the coming weeks.
Going forward in Q1, we still believe the underlying fundamentals of the market are sound and economic recovery is still in play.
And we think technology – though out of favor right now due to the concern of higher interest rates in the short term – will rebound and continue to be part of market leadership going forward.
Yes, we will see a little pullback, but we think patience will be rewarded in time.
During times like this, you have to avoid making emotional decisions.
Remember, opportunity cost is the biggest risk to performance over time.
Opportunity cost is the loss of growth that happens when investors make emotional decisions and move to the sidelines.
We think this, like many other times in the last several years, is a time to be patient – and that will be rewarded.
We believe stocks are simply on sale at the moment. So be patient.
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