Written by: Timothy Calkins, CFA
The financial markets have been volatile in 2022, following three consecutive years which provided strong, positive returns in most diversified portfolios. Even with the pandemic drawdown/recession, the markets did very well through that period.
In the history of the financial markets, drawdowns have happened regularly, and are the price (risk) that investors accept in exchange for the potential of attractive returns on their investments over time. Even knowing this, a market decline can feel particularly unpleasant after an extended period of positive returns such as were experienced in 2019, 2020, and 2021.
Behavioral researchers have found that the psychological pain investors feel from losses is significantly more acute than the pleasure they receive from gains of a similar size. This behavioral bias can lead to feeling that things are worse than they really are, overlooking the good returns experienced prior to the turn of the calendar year.
Market Volatility
What is driving the increased volatility in the financial markets? The simple answer is, uncertainty. The world is transitioning from a period of synchronized economic expansion, relatively stable prices, and international cooperation, to one of economic decoupling, rising prices, and increasing geopolitical tensions.
The Fed
A brief review of how 2022 transitioned to an aggressive Fed trying to control the damage to their reputation:
The FOMC statement from March 17, 2021 opined that, “Inflation continues to run below 2%…the ongoing public health crisis continues to weigh on…inflation…with inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2% for some time.” At this point, the February CPI data was available showing inflation of 1.7%.
A month later, the FOMC statement from April 28, 2021 acknowledged that “Inflation has risen,” but characterizes the rise as, “largely reflecting transitory factors.” The Minutes of the Federal Open Market Committee of April 27–28, 2021 state that, “The 12-month changes in total and core PCE prices were expected to move above 2% in coming months…Inflation was then projected to dip slightly below 2% in 2022 as the influence of these transitory factors diminished. The March CPI data was available showing inflation of 2.6%.
Timothy Calkins, CFA
Co-Chief Investment Officer
Timothy serves as a member of the Nottingham Investment Policy Committee. He brings over 22 years of investment experience to the team. Timothy is responsible for corporate and municipal credit research & trading, as well as contributing to our economic outlook and interest rate expectations. He also leads our alternative investment research and custom allocations, with a focus on private credit and liquid alternatives. Timothy’s membership and active participation with the Buffalo Angels group keep him connected to the local start-up community.
Nottingham Advisors offers both institutional and individual clients experience, sophistication, and professionalism when helping them achieve their goals. With over 40 years of serving Western New York and clients in more than 30 states, Nottingham tailors each solution to fit the specific needs of each client.
For more information about Nottingham’s offerings, visit www.nottinghamadv.flywheelstaging.com or call 716-633-3800.
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