When a Dove Turns Into a Hawk

Warren Buffett once famously said “Be fearful when others are greedy and be greedy when others are fearful.” In early 2020, the global economy and equity markets alike went into a tailspin, with the S&P 500 falling 35% over the course of a month. This caused many fearful investors to panic and sell their equity positions.

Even though the world at large was experiencing unprecedented times, the goal-focused, long-term investors did not panic. On the contrary, these investors stayed the course and even took advantage of the fear by adding to their equity positions at severely depressed prices. There were still 9 months left in the calendar year. When the dust settled, the S&P 500 rallied 78% from its low and closed with a positive return of 16% for the year.

Fast forward to 2022. Like March of 2020, we are seeing significant market volatility to the downside, mainly due to excessive inflation, continued supply chain disruption, the omicron variant, and the Fed’s hawkish stance on interest rates.

The omicron variant is spreading through the US like a wildfire. Although less deadly than prior versions of this coronavirus, it is wreaking havoc on the workforce. Some factories in China, which is home to about a third of global manufacturing, have had to shut down again, furthering supply chain problems. Companies such as Starbucks and Lululemon have had to close stores due to too many employees testing positive and having to quarantine. United Airlines had to cancel flights due to a staffing shortage. Almost no part of the economy has been immune to this problem.

Jerome Powell, Chairman of the Federal Reserve Board, is singing a different tune when it comes to inflation in the US. Up until November he and the Fed held steadfast to the idea that inflation would be transitory, and everything would be fine as supply chains regained their footing. He has abruptly reversed course by dropping transitory from his description of the inflation situation and announced that there will be three interest rate hikes in 2022. Whether the Fed follows through remains to be seen, but the market is acting as if they will.

All of this has led to a current market environment that has been merciless towards high valuation growth companies, and more recently, the market in its entirety. Crowd investors were overzealous during the pandemic, buying companies that got fast forwarded into immediate relevancy in our lives. Rising interest rates, however, tend to disproportionately harm shares of high-growth companies because the market values them based on earnings expected years into the future, and high interest rates erode the value of future earnings more than the value of earnings made in the short term.

Greed drove the prices of many cutting-edge technology stocks to levels that proved to be unsustainable. Currently, fear is driving them down to levels that may prove to be attractive.

The Nasdaq index is now in “correction” territory, which is generally defined as a drop of 10% or more. The Nasdaq has had 66 corrections since 1971, 16 corrections since 1995, and even 4 since the pandemic started. As we’ve stated before, market corrections are common, occur for all sorts of reasons, and happen almost every year. This time is no different. Assuming an investor is allocated properly in relation to their goals and time horizon, the proper course of action, as always, is to not panic.

We are still in the early days of the new industrial revolution- The Digital Revolution. Advancements in data mining, quantum computing, artificial intelligence, robotics, autonomous vehicles, 3-D printing, nanotechnology, biotechnology, materials science, energy storage, and the metaverse are still all in their relative infancy, and in our opinion, will all be an important part of future economic growth and prosperity around the world.
Think back to the recession of 2007-2009. The first iPhone had just been released, there was no Uber, and most of us were still receiving Netflix DVDs in the mail. And of course, Tom Brady only had won 3 Super Bowls. It was impossible to predict what was in store for us back then, just like it’s impossible to predict now. But as investors, we should remain as excited as ever for what lies ahead, even if it means wading through corrections like we are in now.

If there is anything we can do for you, please let us know. Have a great day and cheers to a happy and healthy 2022.

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