Under the Hood Q1 2022
by Danno
Q1 was a wild ride for investors globally. Don't be surprised if that continues for a little bit. To reiterate from last quarter... "We can't know what 2022 will hold, but I'm pretty confident it isn't going to be as smooth as 2021."
If you look at the S&P 500 on a...
Daily basis, you can expect it to be down about 47% of the time.
Monthly basis, you can expect it to be down ~37% of the time.
Quarterly basis, you can expect it to be down ~31% of the time.
Annual basis, you can expect it to be down ~25% of the time.
5-year basis, you can expect it to be down ~12% of the time.
10-year basis, you can expect it to be down ~6% of the time.
20-year basis, you can expect it to be down ~0% of the time.
Here is the update to JP Morgan's outstanding perspective on annual max drawdowns in the S&P...
This is normal. What's weird is years like 2021 where it's smooth sailing and we only have a few 4%-5% selloffs. What's also weird this quarter is that virtually all stocks and all bonds did poorly. What didn't do poorly was Oil, Gold, and virtually all other commodities.
Let's go "under the hood" again and take a closer look.
The US style box looks something like this for 2022:
With this whole cycle of COVID closing the economy, then the reopening trade, and now the rising rates, here is the total performance from January 2020 through Q1 2022:
Interesting that Large Cap Growth is the big winner so far, and that Small Cap Growth, after a rapid ascent in "hot" trades, is now the big laggard for long-term investors.
I thought that Large Cap Growth would be the biggest winner from the onset of the pandemic, and in spite of some soft periods, that's still true. Small Growth started getting hit after the GameStop saga in early 2021, but now all Growth has been underperforming in 2022. How much will the market punish Growth indiscriminately before it finds a long-term bottom and resumes leadership? Another month? 3 months? Another year? Hard to say for sure. It took over 2 full years for the dot com bubble to unwind. This didn't feel like nearly the same kind of run-up as that was.
Now some basic asset classes year-to-date:
Oil spiked, but commodities in general all went up. Nothing else worked. For years, Advisors have included a sleeve of commodities in client portfolios and talked about diversification, and investors have complained about their lack of performance. In Q1, that sleeve of diversification finally paid off. Generally, when rates rise, bond values go down. There's no surprise there. In this case, when the Fed threatens to raise rates rapidly and the market expects them to follow through, stocks went down too. You know me, I love it when the most hated things revert to the mean and make everyone feel stupid. It reemphasizes why diversification and rebalancing is so much more executable than pretending to be able to predict the future.
Combining this whole 27-month COVID period looks like this:
International markets have lagged now for more than a decade. I can't tell you when, but that will reverse violently at some point. Probably right about when people are so sick of them underperforming that they start telling their Advisors to get rid of them.
And by Sector for Q1:
The defensive sectors led in Q1, including an explosion in US oil-related stocks. Not surprising than any of these sectors are doing relatively well in this environment, mostly just surprising that we are in this environment. The Growth-ier sectors have done the most poorly in Q1. You can attach whatever narrative you want to that, the most logical to me is that they were the ones that seemed most obviously would benefit from the pandemic initially.
Since the start of 2020:
Amazing that Energy went from dead last by a mile, to 3rd best in 1 quarter! After earning a grand total of 0% for investors over the prior 13 1/2 years combined, they return 45% in 1 quarter :) Crazy! Outside of that, the real stunner is the recent fall in Communications. Netflix and Facebook have both gotten killed the last 6 months, and those are (were) heavy weightings in that sector. I've hated Facebook as a company for years, but they've been a cash cow. It took TicTok, of all things, to clobber their stock.
Otherwise, Tech is still the big winner, along with Materials, Discretionary, and Health Care, all of which were also early beneficiaries of the pandemic. Real Estate and Consumer Staples have made nice comebacks in the past year, after lagging early after the economic shutdown.
It'll be awhile before we know how things shake out with the war in Ukraine and with the Fed, but those are events. In other words, it's a trade.
We won't be able to look back and say with certainty who "won" the pandemic until 3-to-4 years from now, taking a view of the the entire 5-to-7 year period. It sure is interesting to watch the dramatic shifts in the short-term trading dynamics along the way though. I wonder how many people have gotten all of those shifts right?!? Probably the same number as the number of perfect March Madness brackets :)
Now go drop some knowledge on a friend. I'm out.
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