What changes eight weeks have brought.
It seems only days ago that the market was surging higher and the talk was all about how much action the Fed would need to take this year to battle inflation in an environment where supply chains were stifled, consumer demand was overpowering, and the availability of workers was meager. Beyond that, we saw corporate earnings surging, consumer confidence rebounding, and an expectation that the Omicron surge might be the last hurdle before the eventual end of the Covid pandemic.
It all seems so straightforward in hindsight. Now… we have the Russian invasion of Ukraine, trade and financial embargoes, commodity prices surging, and general increased uncertainty. This is geo-politics. It is a ruthless business.
We, at Atlas, are very concerned about the humanitarian crisis facing the people of Ukraine, the refugees, and the neighboring countries that are struggling to provide for them. This is a disastrous situation that seems to have no defensible reason for having occurred other than the callousness of a dictatorial regime bent on conquering a territory that it wrongfully claims authority over. Few invasions of a territory in recent history have triggered the kind of international opposition that this one has. Our hearts go out to all those families affected by this and we hope for a resolution soon.
All that said, we are not political analysts. We won’t attempt to predict how this will be resolved nor are we interested in exploiting it for our own gain. But, we would like to offer a few observations about past market performances in times like these.
Historical data shows that over time, equity markets will (on average) experience the following bouts of volatility:
- 3 corrections of about 5.0% per year
- 1 correction of about 10% each year
- a correction of more than 15% once every 3 years
- a correction of more than 20% once every 6 years
Some of these periods of volatility are precipitated by an event, others occur as a function of market or business cycles. In the case of the current correction, there may be factors at work beyond the Ukrainian crisis, but the cause is not the issue. The level of uncertainty and subsequent market performance is.
Historically, U.S. equities have typically bounced back strongly after periods of heightened policy uncertainty, as measured by the Global Economic Policy Uncertainty Index. In the 12 months following periods where the Policy Uncertainty Index has exceeded 250, the S&P 500 has returned an average of 23.2%. As of December 2021, the Global Uncertainty Index stood at 269.85.
Along the same lines, bearish market sentiment can be a bullish indicator. Recently, market sentiment has been relatively low and heading lower. From current sentiment levels, markets since 1979 have averaged returns of approximately 8.2% in the following 6-month periods1.
The point here is that while the current headlines are justifiably concerning to investors, they may not be sufficient reason to alter your investment strategy. For those that have cash sitting on the sidelines, these times may provide an attractive entry point for investors that have a reasonable investment horizon and the ability to withstand some level of ongoing volatility.
The yellow brick road may not be paved with gold and there may be challenges along the way, but staying on course with it may lead you to where you want to be.
As always, we continue to monitor the data and seek to make prudent and informed adjustments to our portfolios. If you have any questions about this, or any other financial concern, please feel free to contact your Atlas Wealth Management Advisor. We remain ready to assist you in your journey toward achieving your financial goals.
 Fidelity Institutional CMSG Weekly Market Update, March 7, 2022