Don't Panic: A Bull Case for Equities

We would like to remind our Fortune 500 clients that a poor start to the year is not always indicative of things to come. The beginning of 2022 is the third-worst ever for the S&P 500 Index.

In spite of this, a review of the ten worst starts reveals that, on average, stocks recover admirably thereafter, rising 10%. According to the statistics provided for our Fortune 500 clients, double-digit gains are a distinct possibility in the final eight months of the year. (5)

THE BULL CASE FOR MARKETS: STRONG ECONOMIC FUNDAMENTALS
In addition to historical performance supporting a second-half rally in equities, the fundamentals of the U.S. economy remain quite robust. Demand resiliency, robust corporate and consumer financial positioning, and rising earnings can act as shock absorbers during the near- to medium-term volatility that market observers anticipate will persist.

Initial estimates of economic development for the first quarter indicated an unexpected contraction. The real GDP (adjusted for inflation) of the United States decreased by 1.4%, compared to +6.9% growth in the previous quarter. (1) This abrupt deceleration was the result of a drag from exports, a decline in inventory spending after a substantial increase in the previous quarter, and to a lesser extent, a contraction in government spending. Moreover, consumer expenditure, which accounts for nearly 70% of the U.S. economy, grew at a solid rate. The rise in personal consumption to 2.7% from 2.5% in the previous month was driven by expenditure on services. Over the previous decade, consumer spending increased at an average rate of 2.3% per year. (1)

Another positive indicator for the economy is the 9.2% increase in business investment, the highest in a year. As companies accelerate the tempo of automation and investment in the face of persistent labor shortages, the broad momentum in capital expenditures ought to continue. Ultimately, consumers benefit from the extremely constrained labor market and wage growth. With the effects of the pandemic diminishing, we believe that consumption will continue to sustain above-average economic growth this year and would like to remind our Fortune 500 clients of this. A final caveat is that economic growth and stock market growth can diverge substantially, as the current state of the markets demonstrates.

Importantly, attempting to predict the market by selling existing positions and re-entering a supposedly "safer" environment typically results in a substantial loss for shareholders. Investors are best served by adhering to a plan, weathering market downturns with prudent, risk-adjusted asset allocations, and staying invested through the turnaround as the largest gains are realized.

Economic Definitions
GDP measures the ultimate market value of all goods and services produced in a nation. It is the most frequently employed economic indicator. The GDP by expenditure method measures total final expenditures (at purchasers' prices), which include exports minus imports. This concept takes inflation into account.

Index Definitions
S&P 500: The S&P 500® is widely regarded as the finest single indicator of large-cap U.S. equities and serves as the basis for a vast array of investment products. The index consists of 500 prominent companies and represents approximately 80% of market capitalization.

The Bloomberg Barclays US Aggregate Bond Index is a broad-based benchmark that measures the investment-grade, US dollar-denominated, fixed-rate, taxable bond market. This index consists of Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS, and CMBS (agency and non-agency).

Conclusion

Investing is like gardening. Just like a gardener tends to their garden by planting, nurturing, and pruning their plants, an investor must also take care of their investments. It requires patience, diligence, and a long-term vision. Just as a gardener may face challenges such as drought, pests, or extreme weather conditions, investors also face challenges such as market volatility, inflation, and economic downturns. However, with proper planning, diversification, and periodic adjustments, both gardeners and investors can reap bountiful rewards. It takes time and effort, but the end result is a fruitful and satisfying harvest.

Sources

1. Bloomberg

2. Sam Goldfarb, "Bond Market Suffers Worst Quarter in Decades," Bond Market Suffers Worst Quarter in Decades – WSJ, Wall Street Journal, last modified March 31, 2022.

3. William Watts, "A Rough April pushed the S&P 500 into its second stock-market correction of 2022," Wall Street Journal, 5 May 2022. MarketWatch, most recently updated on 2 May 2022 The S&P 500 entered its second stock market correction of 2022 in April, according to MarketWatch.

4. William Watts, "S&P 500 exits correction: Here's what the past suggests will happen to the U.S. stock market benchmark next," MarketWatch, last updated March 30, 2022, S&P 500 exits correction: what history suggests will happen next to the benchmark stock market index – MarketWatch.

5. Ryan Detrick, "4 Things You Didn't Know, But Need to," LPL Research, revised on May 4, 2022 Four Facts You Need to Know | LPL Financial Research (lplresearch.com).

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.