As I write this the S&P 500 is down 9.80% for the month of January. I was curious as to just how extreme this was, so I decided to plot the monthly returns since January 2000. On average, the S&P 500 gained .49% per month with a standard deviation of 3.79%. If we were in our class, I would call on one of you and ask: ”What exactly does that mean?” Hopefully I would call on someone who had spent the time to watch our video on Standard Deviation to which they would reply: “It means that 68% of the time the monthly S&P return will move within 1 standard deviation above or beyond the average.” In layman’s terms, this means that 2/3 of the time, the S&P will move somewhere between -3.30% and 4.28% on the month. While this is a wide range, it takes into account every month going back over the last 20 years including some doozies like the Tech Wreck of 2000, 9/11, or most recently the March 2020 Covid Crash. Of course, we could take it a step further and say that outside of the norm we will occasionally see a 2 or 3 standard deviation move. That is that 27.2% of the time, or approximately 1 out of every 4 months, we may see a range considerably wider expanding as high as 8.07% to the upside or -7.09% to the downside. Of course, there is that 5% chance that we see a move greater than 3 standard deviations, meaning we decline a minimum of 10.88% or advance at least 11.86%.
While anything can change, good or bad, in the next 2 business days, to put this move into perspective we have to understand that we’re on the verge of a 3 standard deviation move or something that only happens 5% of the time…or 1 out of every 20 months.
In case you’re wondering, the worst month over the last 20 years, clocking in at -20.39%, was November of 2008 followed by a -19.07% decline in March of 2020 during the height of the Covid pandemic. The 2008 slide continued for several months until the market found a bottom in March of 2009 while the Pandemic lows rebounded within a matter of weeks, marking March 2020 the low for the year.
It’s hard to say how this decline will play out however the market is beginning to price in difficult economic times ahead. Regardless of our views on inflation, the market seems to be expressing its views regarding the Feds proposed rate hikes and balance sheet reduction.
The crux of the matter at present seems to be the disconnect between the inflationary data we’re receiving and the Fed’s proposed response. It’s hard to argue that current inflationary pressures are coming from anything other than supply chain disruption combined with the government issuing free money to individuals and small businesses. The combination of decreased inventory due to a global manufacturing halt along with increased demand resulted in a significant hike in prices. You don’t have to be an economist to see this relationship. Unfortunately, the only real tool we have at our exposure is to engage the Federal Reserve to hike interest rates and increase the value of the dollar, which ironically has been the strongest it’s been in over a year. Basically, we’re attempting to fix an ankle sprain with shoulder surgery and the market thinks that ludicrous. I don’t disagree.
What we want to see at this moment is the supply chain begin to loosen up and economic demand start to wane. I feel as if we are seeing this as data such as the recent PMI was down considerably. This tells me the economy is attempting to sort out these issues on its own and we don’t need additional ‘slowing’ measures to help. Of course, should this not transpire sooner rather than later, the Fed will be forced to pursue their aggressive rate hikes and I suspect the market will continue to struggle.
2021 was a strange but wonderful year and while I anticipated a bumpy start to 2022, this has so far taken the cake. What I do know however is that many investments are beginning to become very attractive and worthy of purchase. We have our shopping list out and will not hesitate to step in when we see the opportunities. I know many have been patiently waiting for bargains, and while it is very hard to step in when others are panicky, a steady hand and an unemotional response is typically the way to remain successful regardless of what the markets are dishing out.
As the markets continue to remain volatile you can bet I will continue to relay thoughts and views. Stay tuned as we watch everything from inflation to Russia play out in real time.
*All data taken from S&P 500 closing monthly closing values.