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Point 32 Brief: Geopolitics and Market Volatility Update

Point 32 Brief: Geopolitics and Market Volatility Update

February 22, 2022
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Dear Valued Clients,

We hope this note finds you well.  As you’ve undoubtedly noticed, volatility has returned to the capital markets in 2022.  Though it is certainly not fun while experiencing, volatility remains the price of admission and should be expected as investors.  The equity market is currently experiencing the first correction in nearly 2 years (i.e. the S&P 500 is currently off ~ 10% from recent highs).  This is a result of uncertainty around inflation, Federal Reserve policy implications, and concerns of geopolitical conflict.  While often difficult to stomach, it’s important to remember that 3-4 pullbacks between 5% to 10%, and one correction greater than 10% every 12 months, is the norm rather than the exception.  While geopolitical issues between Russia and Ukraine can certainly add to short-term market instability, history reflects that these types of events seldom have long-lasting market impacts. 

 Source: Alliance Bernstein- What If [Insert Geopolitical Headline of the Moment] Sinks the Market?

While we don’t want to be too dismissive regarding geopolitical events and acknowledge that emotion can create wild swings in markets over the short term, it is important to note that corporate earnings are the real long-term driver of equity markets.  To this point, earnings overall have continued to be strong despite all mentioned current concerns.  This further supporting the old adage that the stock market climbs a “wall of worry.”  The consensus estimate for the S&P 500 Index earnings per share (EPS) was previously less than $170.  Now with fourth-quarter results mostly in the books, we estimate that reported earnings have come in around $208 per share thus far, or +22% above previous quarterly earnings estimates, and over a +30% year-over-year increase. 

Our team at Point 32 does not expect, nor hope, that the current Russian invasion talks change expectations that the Federal Reserve will begin to normalize interest rates beginning this March.  We feel that interest rates need to be increased to combat inflationary pressures and currently believe that current volatility around Russian actions won’t impact this trajectory.  Please don’t hesitate to reach out should you have any questions about your risk profile, objectives, and portfolio strategy. As the last chart illustrates below, having a plan and maintaining an investment strategy through volatile times has proven to be the most prudent strategy of all.

 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The opinions expressed in this material do not necessarily reflect the views of LPL Financial. 

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.