You're Better Off
Does it feel bad? It's probably not so bad...
Financially, most Americans are better off than just a few years back. Whether they were recipients of government outlays, the beneficiaries of record low interest rates or participated in the great uptick in wealth-building assets of recent years.
How do we know this? Workers have had the luxury to choose employment or not, real estate values have dramatically increased, and from pre-COVID December 2019 through December 2021 investors in broad market averages were up 47% (a number that includes the 35% February/March 2020 COVID declines). Employment is readily available to millions of able workers if they choose. Investors allocated to the S&P 500 during that two year period (and then if we also include 2022 declines) are around 32% wealthier than they were a little over two years ago.(1) That's greater than the rate of return over "typical" multi-year investment periods.
2021 Was All About Steroids
In the middle of this multi-year period was 2021, a year that was a huge beneficiary of financial stimulus. One of the domino effects of stimulus was speculative investing that took on new art forms that year. Fidelity had a 23% increase in individual investor accounts in 2021 - mostly inexperienced, novice investors. The RobinHood investment app made trading a hobby. The addictive nature of the app created a new generation of speculators that traded in and out of questionable, poor quality individual securities and shiny new asset classes such as cryptocurrencies.(4) In 2022, many of these same securities have seen the most massive declines (50-80% downdrafts are not unusual).
It was this speculation that prompted us to heavily downsize our allocation to the large growth sector mid-year 2021.(2). Large growth has been hit harder year-to-date (down about 22%) than the broader market.(1)
This Year: Totally Expected
In the midst of all the speculation the last two years, one thing was missing: the correction one should look for virtually every year. It would be silly to go through a lifetime of investing and not expect these to occur as they always have. Corrections help take out the excesses and make things right again. In 2022, this is exactly what has happened.
Speculative securities and asset classes have been hit hardest - we noted 50-80% declines. But it is also evident that there has been a flight to quality. On a relative basis year-to-date, high-quality securities are performing extraordinarily well. Amazingly well. The high-quality, financially strongest company stocks (top 11% in financial strength) have declined by 7% YTD vs a 22% YTD decline for the entire universe of 5,500 stocks we evaluate. For reference, as of May 27, the S&P 500 has declined 13% from its highs.(1)(5)
Is It Time to Buy or Sell?
It has been a challenge to find undervalued securities over the last year. We have bemoaned this harsh reality in our communications for quite some time as we waited to redeploy cash from overvalued individual securities sold in the last year. Our system evaluates over 5,500 stocks and found virtually no undervalued candidates that met our criteria.
In recent weeks, this has been remedied as we found selected positions to buy. We opportunistically bought several positions to take advantage of oversold quality securities. Based on this valuation shift, our perception is that the market has become fairly valued in recent weeks, and our subtle value-based strategies took advantage of this. We would suggest that the market is fairly valued now - not undervalued.
Patience wins performance points over time.