The recent decline in the equity markets and AMI's outlook for what's next.
January 2022 - The stock market, as defined by the S&P 500, ended 2021 near an all-time high, but has since slid 8% in a relatively short timeframe. We believe inflation fears, the Federal Reserve’s tightening of monetary policy, and fears of Russia invading Ukraine are the primary triggers for the selling. While inflation and the Fed have been known to investors for some time, the Russia situation is new and potentially concerning should the situation escalate. Nevertheless, we believe this is a normal and healthy correction that could stabilize and reverse with some good news. For reference, a correction is typically defined as a 10% (or more) decline but there is no hard and fast rule to this. In just the past few years the market has experienced three corrections of 8-19%, not including the pandemic crash (see below table). Each time, the market resumed its growth trend within a relatively short period (see chart below).
While we do not know at this point how long this correction will last or what the ultimate decline will be, we do not believe that this is the start of a bear market in which the decline would be much deeper and last longer. In our view, a combination of improving economic data, evidence of the Fed getting a handle on inflation, and some diplomatic resolution in Eastern Europe will go a long way to getting the stock market back on solid footing and reestablishing the long-term bullish trend. While still early, Q4 earnings have generally been positive, with companies able to manage input costs through pricing and what appears to be a resilient consumer. At the end of the day, corporate profits drive stock market performance, and what we’ve seen thus far is indicative of a broader recovery.
One other important point is that much of the negative headlines during this correction have focused on stocks with extremely high valuations that became “frothy” during the pandemic and Tech stocks with little or no earnings. To highlight this point, we present the one-year performance of the Goldman Sachs Non-Profitable Tech index versus the S&P 500.
Source: Goldman Sachs
Our strategy at AMI is highly diverse with a focus on quality companies that have profits and cash flows. While few stocks are immune during periods of correction, we believe the companies we own will continue to grow and are in a good position once the market recovers.
This communication is prepared and distributed by AMI Asset Management (AMI), an SEC-registered investment adviser. The information contained herein and the opinions expressed are those of AMI as of the date of writing, prepared solely for general informational and discussion purposes. The information contained in this communication has been compiled by AMI from sources believed to be reliable; however, AMI does not make any representation as to their accuracy, completeness or correctness and does not accept liability for any loss arising from the use hereof. Such information and opinions are subject to change without notice due to changes in market or economic conditions and may not necessarily come to pass. References to specific securities are not intended as recommendations of said securities. The reader should not assume that any investments in securities, sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. Past performance is not a guide to future performance and future returns are not guaranteed.