While 2021 was an excellent year for the equities markets— the S&P 500 index returned an eye-popping 26.9%– 2022 is off to a rocky start.
Despite a strong two-day rally to close the month, the S&P 500 index finished down 5.3%. The broad S&P 500 Index performed better than the tech-heavy NASDAQ, down 9%, and the major growth asset classes; (US Large Cap Growth: -12.91%, U.S. Mid Cap Growth: -14.61%, and the US Small Cap Growth: -14.37%).
Why the Abrupt Reversal from 2021?
Challenges with inflation and supply chain shortages persist. The Federal Reserve has signaled the potential for interest rate increases, and possible Russian aggression in Ukraine has drawn the world’s attention.
With these headwinds and geopolitical events, is it surprising that the markets have become more volatile and turned down? Perhaps not.
But what has not changed in the last 2 months, for many clients, is their long-term financial plan.
January saw the markets whipsawed. On January 24, widespread selling sent the market down 4% before it roared back to end the day with a slight gain. Are 4% daily moves in the market common? No. Are they alarming? Absolutely.
No one enjoys watching the values in their accounts decline, and it’s hard to keep a long-term mindset amid current extreme market volatility. How can we reassure clients and keep them focused on their long-term financial goals?
It starts with open lines of communication.
“This is crazy. When does it end?”
I was confronted with this statement and rhetorical question during a recent conversation about the markets on January 27, 2022.
Based on the question, there seemed to be an expectation that I would have some insightful prediction of what would happen next in the market. I did not. Instead, I shared that a major economic indicator, overall growth, is positive.
“Were you aware that the U.S. economy grew at 5.7% in 2021, the fastest since 1984?”[1] I asked.
I then asked what had fundamentally changed with his investment plan – other than the short-term unrealized losses – in the past month? I acknowledged his concern, shared a positive, and redirected him to focus on his long-term plan.
Strategies with a Focus on Long-Term Goals
What are other strategies to help clients focus on their long-term goals during volatile markets?
- Provide historical perspective. Market volatility can be concentrated. From January 1, 2020 – June 7, 2020, there were 35 daily gains or losses of 3% or more. In the previous 5 years, there were 11 daily moves of 3% or more.[2]
- Re-engage with the asset manager. Does the client understand the asset manager’s strategy in the current market environment? Would it help to have a refresher?
- Diversification. Asset classes rotate as they fall in and out of favor. Are the client’s assets well-diversified?
- Market timing rarely works. Why? History suggests that the market movement is essentially unpredictable. “History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.” Shelby M.C. Davis
- Dollar-Cost Averaging, DCA. While DCA is not a guarantee of investing success, it avoids trying to time the market, could minimize investor regret if the market declines after investing a lump sum, and could be a call to action for some by not committing to investing all at once.
Get Help
Do your clients want to check in during periods of market volatility? What is their preferred engagement – phone call, email, or a social post? ESI Marketing has a variety of materials that address market volatility and will help to foster client engagement. Please see the below links for additional information. ESI Investment Marketing, Guide to Market Fluctuations, Fidelity and Envestnet brochure links.
If you would like to discuss registered rep or client resources, please contact ESI Business Development, 800-344-7437.
Dan Randall, CFP®, CLU, ChFC
Vice President – Product Management, Equity Services Inc
References:
1 Washington Post, 1/27/22
2 A Wealth of Common Sense; The 2020 Stock Market by the Numbers, 6/7/2020
[1] Washington Post, 1/27/22
[2] A Wealth of Common Sense; The 2020 Stock Market by the Numbers, 6/7/2020
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