February Market Update

Dear Clients and Friends,

Stocks have gotten off to a rocky start in 2022, with the potential for Federal Reserve rate hikes coming and the geopolitical worries over Russia and Ukraine only adding to the uncertainty. We don’t want to minimize the impact of that major geopolitical event, but there is some positive news out there, even though it might not feel like it.

Starting with Russia and Ukraine, the U.S. economy and the overall stock market likely won’t be impacted much by the recent conflict. In fact, stocks took most previous major geopolitical events in stride. Looking at more than 20 geopolitical events such as the attack on Pearl Harbor and 9/11, the S&P 500 Index fell only about 5% on average, and the average time for the market to return to its previous levels was just 15 trading days.

Here are some important numbers that should help put the potential impact of the Ukraine invasion in context:

• The S&P 500 Index officially moved into a correction of 10% this week for the first time since March 2020. Since 1950, there has been an average of one 10% correction per year, so some volatility was likely simply due.
• On average, the index sees a peak-to-trough correction of 14% in any given year, and even in up years there is an 11% correction on average.
• After a correction of 10-15%, the index has seen an average one-year gain off the lows of 22% and has gained in 12 of the 13 one-year periods.
• Midterm election years tend to be among the most volatile out of the four-year presidential cycle. In fact, the average midterm year sees a peak-to-trough pullback of 17.1%, but stocks are up more than 30% off the lows on average a year later.

The good news is corporate America continues to see strong earnings. S&P 500 earnings per share in the fourth quarter are tracking to a 31% year-over-year increase, roughly 10 percentage points above the consensus estimate when earnings season began. The top-line growth was extremely strong as well, with revenue growth up close to 15%. Lastly, profit margins saw very little compression, as companies with pricing power have been able to pass along higher costs and largely preserve those high margins, which are well above pre-pandemic levels.

Inflation does continue to persist at higher-than-normal levels, and the Federal Reserve has discussed raising interest rates several times this year to help keep inflation in check. It is important to note, however, that the Federal Reserve primarily raises rates when they are confident the economy can withstand said hikes. In the last four rate hiking cycles by the Federal Reserve, the markets saw short term weakness, but then a strong recovery. The S&P 500 was down 3.8% on average during the first 3 months following a rate hike, however, the market was up 10.5% on average 18 months following a rate hike.

Given the various uncertainties facing investors, the road ahead could remain bumpy in the short term. However, with U.S. consumers and businesses in solid shape, we still forecast above average economic growth for 2022 which should help to support markets as we progress throughout the year.

We invite you to reach out should you have questions or concerns regarding your portfolio.

Best regards,

Gallacher Investment Committee