Weekly Market Update

Throughout 2021, “buy the dip”, or investors eagerly purchasing stocks after declines, was cited as one of the major reasons for the S&P 500 ending the year with a total return of 28.7%. Buying the dip, is by no means a new phenomenon, but last year it was an historically strong investor impulse as per research from Bank of America, global stocks saw record inflows of well over $1 trillion. As a result, the S&P 500 achieved 70 new all-time closing highs in 2021, and going back to the Great Recession, only 1995 has seen more record market closes (see chart from Compound Capital below).

To start 2022, the S&P 500 initially picked up where it left off, reaching a new all-time high on the year’s first day of trading, but ever since then a ramp up in interest rates has caused stocks to pull back. However, some weakness in January after an over 20% gain the year before is not uncommon. Over the short-term we expect market volatility to continue as the Federal Reserve accelerates its reduction of economic support and Friday’s jobs report indicating the unemployment rate had fallen to 3.9% in December. These are likely to add to conviction for a potential interest rate hike in March. Next week’s consumer price index (CPI) report will certainly be closely watched as inflation will factor heavily into this recent rise in interest rates.

Longer-term, however, there is cause for optimism as the momentum of 2021 generally bodes well. For example, after 1995 registered 77 new all-time closing highs, the S&P 500 saw four straight years of double-digit percentage gains. Furthermore, the S&P 500 is on a seven-quarter streak of positive returns, a feat that has only occurred six other times since 1950, and in every instance the index was materially higher six months later (per LPL Financial). Market returns after midterm elections are also constructive, as per research from Fisher Investments, since 1926, S&P 500 returns during Q4 of a midterm year and each of the subsequent two quarters, have been positive 87% of the time. In the meantime, investors should anticipate choppy trading as markets get acclimated to the idea of tighter monetary policy.

Ian G. Browning, CFA | Director, Investment Strategies & Shareholder
Peter E. Simmons, JD | President & CEO