Anatomy of a Downturn
Telemus Weekly Market Review May 9th - May 13th, 2022
This week marked the sixth straight negative week for the S&P 500 with the index loosing -2.4%. Year-to-date the S&P 500 is down -15.1%. Equity investors recognize that downturns in the market will happen, yet they are never fun to endure. As market drops transpire, we are all faced with a mirage of behavioral emotions. In this piece we attempt to walk through what often occurs during a market downturn and how to interpret what may be transpiring behind the scenes and inside our minds.
Extended downturns often begin with singular events that often serve kindling for a larger fire. Similar to dominos falling on top of one another, the linkages between these singular events and economic/market fundamentals is what spurs broader impacts. In the current environment heightened inflation has led to higher interest rates and now expectations for slowing economic growth. Collectively these have been the predominant fuel for this year’s drawdown.
In most years we experience an equity pullback of nearly 10% or more. Thus, it’s not uncommon to see one. When markets experience more severe double-digit drawdowns there can often times be non-fundamental or non-economic reasons spurring a continued slide in share prices. Common triggers driving oversold market conditions are portfolio deleveraging (margin calls) along with selling pressure from speculative buyers who have begun to capitulate. These often hit at similar times, exacerbating downturns and leading to bouts of heavy selling pressure.
While painful, down markets are opportune moments to have a real time check on your risk tolerance. Investors often talk about volatility, but it’s not volatility on the upside that tend to cause angst or concern. Downturns are time to revisit whether your portfolio’s downside volatility is something you can tolerate.
The nature of investing is that it involves an element of uncertainty. Negative markets often come at times where there is greater ambiguity. In the current climate there is considerable uncertainty around inflation, interest rates, geopolitical events, the state of the economic cycle, and even the status of the coronavirus pandemic. When assessing the reasons for the pullback, one needs to differentiate between near-term and long-term elements of uncertainty. If the reason for the downturn is something that will clear itself within a year or two, it’s unlikely to have a long-term impact on the ability to achieve long-term investment objectives. If it’s likely to have a sustained impact, then it may be appropriate to make adjustments to one’s long-term investment strategy.
When considering this year’s drawdown, it’s important to put into context that equity markets are up 86% from their lows in March of 2020 (even after this year’s 15% contraction). In our opinion, a pullback in share prices is not unexpected and frankly is not bad for the long-term health of the market. Nevertheless, markets such as this are challenging to endure. However, having context for what’s transpired, what’s changing to cause the market disruption, and understanding your investment horizon and risk tolerance will help to weather blustery down periods in the market.
All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Telemus Capital cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. Current and future portfolio holdings are subject to risk. Risks may include interest-rate risk, market risk, inflation risk, deflation risk, currency risk, reinvestment risk, business risk, liquidity risk, financial risk, and cybersecurity risk. These risks are more fully described in Telemus Capital's Firm Brochure (Part 2A of Form ADV), which is available upon request. Telemus Capital does not guarantee the results of any investments. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, and may lose value.
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Matt joined the Telemus team in 2018. As Chief Investment Officer, he leads the firms the investment process and research effort. Matt has experience as an equity analyst and portfolio manager and has advised corporate pension plans on their manager selection. He’s been quoted in Money Magazine and Barron’s.