February is referred to as the border between Winter and Spring, but the border didn’t detract volatile market and economic conditions from spilling over from January. Markets continued their rocky start to 2022 with the potential for Federal Reserve rate hikes coming in March as well as the geopolitical worries over Russia and Ukraine only adding to the uncertainty.
We don’t want to minimize the impact of a major geopolitical event, but the truth is the U.S. economy and the overall stock market likely won’t be impacted much by the recent Russia and Ukraine 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.
On the other hand, the Nasdaq finished down 12.10% year-to-date, which marks the worst January/February since 2009. The Dow Jones Industrial Average, S&P 500, and the Russell 2000 are off to their worst starts since 2020, and it is the first time since October 2000 that they have all had 2 straight down months.
With anxiety running high, here are some important numbers that should help calm some nerves.
- 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.
As mentioned in last month’s blog, potential for persistent volatile markets remain likely, especially considering mid-term 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 (FactSet), roughly 10 percentage points above the consensus estimate when earnings season began.
Finally, COVID-19 trends are very positive as well, with new cases down more than 90% from the January peak (John Hopkins University). Many states are lifting mask mandates and a strong reopening will likely take place over the coming months and into the summer. Backlogs and bottlenecks continue to slowly trend the right way to ease the supply chain disruptions, and the labor force remains quite healthy as well.
The concerns and uncertainties are real, and the road ahead could be filled with more bumps and bruises. However, with U.S. consumers and businesses in solid shape, the U.S. economy could grow as much as 4% this year, much better than the pace of the last recovery.
Director of Wealth Advisory
All index data from FactSet.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.