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Market Corrections and Market Volatility in 2022: An Economic Update from Your Advisors at EBW

Market Corrections and Market Volatility in 2022: An Economic Update from Your Advisors at EBW

May 25, 2022

Market corrections are challenging and scary for investors of all types. This is due to their speed, unpredictability, and typically, the fact that underlying catalysts are somewhat unique with each episode. Also, easy answers to these dynamics are often difficult to come by despite what the folks on your TV say. Stock market volatility, with its schizophrenic up and down days certainly add to the challenges. However, when taking a multi-year 30,000-foot view, we start to see some similarities and often realize that things aren’t really ‘different this time’.

Although it doesn’t provide much consolation while they’re happening, these market corrections are part of a normal, well-functioning market. In fact, since 1980, intra-year market declines have averaged 14%. Despite this however, annual returns were positive in 32 of those 42 years.

There’s a lot for market participants to sort though right now, inflation, interest rates and how aggressive our Federal Reserve Bank will be in raising them, the ongoing COVID pandemic, especially as it impacts China and of course the horrific events unfolding in the Ukraine. As we have more clarity into these issues, we expect the markets to calm down.

When sentiment is as negative as it is right now, it’s easy to miss the good things that are also happening in our economy. 77% of the companies which have reported earnings have reported better than expected earnings. Unemployment remains very low and close to full employment. Retail sales came in better than expected and while still very high, inflation has moderated a bit.

Although it doesn’t feel like two years ago already, the equity market corrected very quickly in March 2020, when the emergence of Covid-19 brought an unexpected pandemic not seen in the modern era. This kicked off a -33% drop in the S&P 500 as the worst investor fears of severe disease and an economic shutdown took over. While many shutdowns did happen, and the economy did experience a pronounced recession, government fiscal and monetary stimulus were employed to help bridge the gap. Following these and the diminishing effects of the virus the economy recovered as did stocks. In fact, the stock market bounce back could be considered exceptional by its magnitude and speed: the S&P 500 index rose nearly 120% from its low on 3/23/2020 through 12/31/20211. While the economy has continued to gain ground toward pre-pandemic activity levels, this performance pattern is instructive as market corrections are often followed by sharp recoveries—highlighting the importance of staying the course.