Rough Start for Financial Markets
Dear Clients and Friends,
We wanted to be in touch with a little perspective on the financial news.
The year has gotten off to a rough start for financial markets. Stocks, bonds, precious metals, and most other asset classes have gone down in value to various extents. The stock market in the US is down a little less than 10% from its highs as I am writing this, with technology and “growth” investments down more than the market overall.
There are many explanations as to why the year has started off so rocky, including concerns about interest rates, inflation, supply chain challenges, and geopolitical concerns. Those are all legitimate factors that might explain market movements, and they will need to be monitored going forward. However, these issues are a normal part of investing and markets, and will forever be a part of our investment conversations, and so these alone probably do not fully explain why markets have behaved as they have.
Another challenge facing markets going into 2022 was the high price of most financial assets, especially US stocks. The problem is not simply that stocks were high, but that they were trading at higher “valuations” than average, meaning investors were willing to pay higher prices than normal for stocks. One way to think about this is that the price of an individual stock (and by extension the stock market) is at least partially driven by the actual earnings of the company in question. A long-term historical average “valuation” for stocks has been about 15 times a company’s annual earnings, and going into 2022 the valuation was closer to 20.
Looking to the future, the economy is quite healthy (especially in the US), and that should generally bode well for stock market returns. As for valuations, investors might shrug off the bumpy start to the year and be content to own stocks at valuations like what we saw last year, which would send the stock market higher. Or, valuations could stay where they are, which means we might not see the spectacular returns that we had the last few years but that improved earnings will slowly send stocks higher over time. Or, investors might decide that stock valuations are still too high, and the market could drop more from here to get closer to the historical average. And, of course, something unexpected could come along and completely change the outlook, for better or worse.
As always, the direction over the next few months and few years is impossible to predict, which is why we work so hard with you to make sure your investments and financial plan are built to be able to hold up well whatever the markets have in store for us. If you have any questions about all this, or about how your plan is built for this kind of unpredictability, please reach out.
We hope that you and your families are healthy and doing well, and we look forward to our next conversation with you!
Best wishes,