Financial Professionals

May 16th, 2022

Market Volatility Persists—But Economic Fundamentals Are Solid

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The persistence of market volatility is starting to weigh on many investors, understandably. Volatility is almost always unsettling, especially when it is accompanied by worrisome headlines about inflation, a war, Federal Reserve policy, and lockdowns in China.

Investor sentiment surveys showed that by early May, over 50% of respondents were bearish about the market’s direction over the next six months. 26.6% of respondents were neutral, and just 24.3% were bullish. This is what corrections do to investors.1

I’ve been in the investment management business for over 40 years. But over that time, I have found that the more worried and concerned individual investors are, the better of a time it is to buy or hold stocks. Conversely, the more confident individual investors are that now is a great time to buy – with statements like ‘generating strong returns is a sure thing’ – the warier I would be of buying stocks. A good rule of thumb for most investors: try, if possible, to do the opposite of what your emotions are signaling.

For readers who are feeling the weight of the selling pressure and are having doubts over whether the market or economy will recover, that means trying not to give in now. Stocks are trading at steep discounts relative to where they started the year, which makes a much stronger case for buying stocks than selling them, especially given the solid earnings growth outlook for the year.

To be sure, I am not saying that stocks will surely rally from current levels with no additional downside. No one can know exactly when the correction will end. Historically, corrections have lasted anywhere from a few weeks to a few months, and they consistently rattle investors to the core. Since 1980, the S&P 500 index has experienced an average intra-year decline of -14% – a significant decline! But since 1980, the market has also finished the year in positive territory 76% of the time, underscoring the rewards paid to investors who remain calm and even-handed.2 

Inflation and interest rates represent priced-in news, in my view, but a new factor in today’s market is China’s lockdowns, which appear likely to contribute to more volatility in the weeks ahead. China’s economy accounted for 18.1% of global GDP in 2021, and it is responsible for nearly one-third of global manufacturing output. An economic slowdown in China would be meaningful to the world.

That’s why uncertainty over the country’s zero-tolerance Covid-19 policy is rattling markets, in my view. Lockdowns in manufacturing hubs like Jilin province and major cities like Shenzhen and Shanghai have shuttered factories and stores and resulted in a drastic decline in exports. China’s exports rose 3.9% in April year-over-year, a sharp fall from the 14.7% growth rate posted a month earlier.

A slowdown in China’s economic output can have ripple effects across supply chains and on global economic growth in general. Large commodity exporters like Brazil, Chile, and Australia have seen sagging sales in copper, oil, and iron ore to China while manufacturing countries like Germany, Taiwan, and South Korea are worried that China’s significant link in the supply chain will be compromised. U.S. companies sell to China’s market and also import key materials, making just about every developed economy exposed.3

We cannot know how long or how far China’s lockdowns will go, but what does appear clearer is that China’s government will not likely allow a recession. Economic growth is too vital to the government’s stability, and the scenario may be setting up much like the U.S. economy did in 2020 and 2021 – when stalled growth because of pandemic restrictions gave way to surging growth when pandemic risk faded. If that’s the case, and China delivers even a slightly better-than-expected outcome, we could see markets roar back, in my view.

Bottom Line for Investors

Lost in the shuffle of concerns and fears are strong economic fundamentals that still exist in the U.S. economy, which are largely being overlooked today. U.S. consumers continue spending at a strong clip in spite of inflation, corporations are flush with cash and making investments at a solid pace, and the U.S. still has one of the best jobs markets in history—at present, there are roughly two available jobs for every one unemployed person in the country.

It’s also true that over the last 12 months, S&P 500 companies have reported a collective net profit margin of 12.18%, representing the highest after-tax corporate profits relative to GDP that have ever been recorded (records date back to the 1940s).

Generally speaking, these are not the types of metrics that accompany recessions.

At the end of the day, it is important for readers to remember that volatility is the price investors pay in the short term for attractive returns over the long term. The day-to-day ups and downs are sometimes hard to swallow and can trigger emotional responses, but my advice is to try and move past them. Daily moves in the market will not permanently alter a portfolio’s expected returns over the next 10, 15, or 20 years.

Disclosure

1 AAII. May 11, 2022. https://www.aaii.com/sentimentsurvey

2 J.P. Morgan. Guide to the Markets. April 30, 2022. https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/

3 Wall Street Journal. May 12, 2022. https://www.wsj.com/articles/chinas-economic-slowdown-is-rippling-all-around-the-world-11652347800

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
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