For traders and investors, the first three months of 2022 have been an interesting quarter. It started with the major indices at record highs, despite real trouble brewing. Inflation, obvious to anyone feeding their family or filling their car, was now also becoming evident in official data. Russia had started amassing troops on the Ukrainian border in a very threatening way. And yet, with plenty of cash in the system and rates at historically low levels, equities continued to thrive.
That changed in January and February, but in March stocks strengthened again, and the rebound was almost as dramatic as the decline that preceded it. In one month, the major indices have regained around two-thirds of the losses suffered in the previous two. Looking back at the end of the term, what can we learn?
The first lesson is that long-term investors should ignore perma-bears and alarmists who always get airtime when the market is down. They were launched this time too, warning of a major recession as the Fed changed course and sanctions on Russia began to bite. They always say a major recession is coming, and they might be right, but if the history of the US economy tells us anything, it’s that it’s resilient. America has an incredible ability to focus on business growth and profitability through any type of problem. He accepts, adapts and bounces back, no matter what the world throws at him.
To make this work for you, however, you need to understand the second lesson: in the short term, stocks move, but not always up. The market sometimes goes down as well as up. When it does, however, it’s almost always an opportunity to buy quality names for discounted long-term holdings. Once you accept this, the logical thing to do is to hold or free up capital during periods of strength in order to deploy it during periods of weakness. This does not mean to wholesale, but to selectively take profits to maintain a ten to fifteen percent cash position in your portfolio when the market is rising.
Last but not least, volatility between sectors and major indexes varies, but long-term trends generally hold. Early in the quarter there was a lot of talk about the Nasdaq underperforming and a big sell-off in the tech sector, but what most people forgot to mention was when it happened. the last time an exaggerated decline followed about three years of massive outperformance. :
The chart above shows the Dow tracking ETF, DIA, in blue against its Nasdaq counterpart, QQQ, in green. As you can see, while it is correct to say that QQQ posted a more exaggerated decline in the first two months of this year, it is really only part of a pattern of greater volatility which included spectacular gains since the drop in covid.
If you took part in this surge, you’re still better off than if you didn’t, and that’s because it’s not just about high risk appetite. It reflects a fundamental and accelerated change in society. Technology and automation are becoming more and more dominant in business and in our daily lives. The tech sector, which is heavily represented in the Nasdaq index, is taking over from manufacturing and retail as the engine of the US economy. Given that while there will continue to be the kind of volatility we saw this quarter in tech stocks, they should make up part, if not most, of every portfolio.
All in all, looking back at an interesting quarter, the biggest takeaway is as old as the markets themselves, a phrase printed in big friendly letters on the cover of The Galactic Traveler’s Guide: DO NOT PANIC ! When you consider what has happened over the past three months, the most remarkable thing is that the broad index, the S&P 500, was down only 3.8% in the first quarter, a sign that in in the end, the market accepts even important news.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.