Observations is a monthly advisor-centric column that touches on a variety of current issues.
Seasonality caught up with equity markets again this year. Historically, the two weakest months of the year for equities are August and September. So far, that historical pattern has not failed to disappoint.
After months of extremely narrow market leadership, strength in equities finally began to broaden out in June. It has been well publicized that much of the market’s advance this year has been driven by a handful of the largest technology focused companies, while all other companies have muddled along.
If you are coming out of May even more confused than before, you are likely not alone. Much of the year has been dominated by conflicting economic and market signals.
The month of April was marked by a dearth of volatility at the broad index level. The S&P 500 rose a modest 1.5%, while the Nasdaq was flat, and the Russell 2000 declined 2%.
After years of zero interest rate policy (ZIRP), cracks in the financial system began to emerge in early March. You would never know it by the positive performance seen in the S&P 500 and Nasdaq, as the large-cap indices climbed 3.51% and 6.69%, respectively.
Interest rates and the future path of monetary policy was the theme of the month in February. As we’ve discussed numerous times since short-term rates began to rise off the zero bound in late 2021, the direction and speed of change in short-term rates matter a lot for the equity market.
Last month, we closed out Observations by stating: “even though the calendar has flipped to a New Year, most of the uncertainty and questions regarding our economic future remain.” Since the start of the year, there has been nothing to dispel this notion.
Long-time Tandem followers have undoubtedly heard us talk about mean reversion and even how the foundation of our investment process is built around reversion to the mean. If you stretch out a rubber band far enough, the more you pull on it the harder and the more violent the snapback will be. 2022 will go down as the year of the snapback.
November was a month that had a little bit for everyone. Bullish, bearish, and flat-out confused biases were all confirmed.
After a dismal August and September where the S&P 500 declined 4.2% and 9.3%, respectively, the market was due for a bounce. Over the past month, equity markets staged a bit of a comeback.