Uncertainty Has Become the Predominant Theme of 2022

April 07, 2022

“The secret for winning in the stock market does not include being right all the time… The key is to lose the least amount of money possible when you are wrong.”
William O’Neil, 1933 – present, American entrepreneur, stockbroker and writer


It is certainly one of the most famous and recognizable mountains on the planet. Its nearly perfect symmetrical pyramidal peak pierces the sky like a medieval spear and serves as a defining landmark. Separated by sharp ridges, its four triangular faces rise above the surrounding glaciers and point almost directly to the four points of the compass.

Beautiful yet intimidating to even the most skilled mountaineers, the iconic Matterhorn holds a dark reputation as one of the world’s most difficult and dangerous mountains to climb. At 14,692 feet (4,478 meters) above sea level, it’s barely half as tall as Mount Everest, but the route to its summit presents more technical climbing challenges than the commercial routes on Everest. Often referred to as ‘the Mountain of Mountains’, it remained unclimbed after most of the other great Alpine peaks had been conquered.

It wasn’t until 1865, when a party led by British mountaineer Edward Whymper and six other climbers were the first ever to successfully set foot on the summit of the Matterhorn – the tallest unclimbed peak in the Alps at the time. In his book, ‘Scrambles Amongst the Alps’, Whymper recounted: “At 1:40 pm, the world was at our feet, and the Matterhorn was conquered. Hurrah! Not a footstep could be seen.” Elated at having earned themselves a place in the history books, they spent an hour at the top, celebrating and enjoying the breathtaking view before beginning their descent.

Sadly, their sense of triumph was short-lived. Soon into their descent down the Matterhorn’s fearsome North Face, a young novice climber slipped on a treacherous section and dragged three others into the depths who were roped to him. Above, Whymper and a Swiss father-and-son pair who had been guiding the group had to watch in helpless horror as the bodies of their companions plummeted over an edge onto the Matterhorn glacier thousands of feet below. Shivering and unnerved, the three men did not move for half an hour before they could force themselves to continue the descent.

It’s estimated that over 500 alpinists have died on the Matterhorn since that first climb in 1865, making it one of the deadliest peaks in the world.

For Whymper and his companions, the first successful ascent of the Matterhorn was an incredible achievement; but it was only the halfway point. A mountaineer’s ultimate goal should always be to ascend and descend the mountain safely. Like the ascent, the descent requires proper training and preparedness, as it is often the most dangerous part. Legendary mountain climber Ed Viesturs, who has successfully reached the summits of all 14 of the world’s 8,000-meter peaks without supplemental oxygen, puts it rather succinctly, ‘getting to the summit is optional; getting down is mandatory.’

Investing is much like mountain climbing – a journey with no shortcuts to success. It requires patience, and it requires risk management.

Most of us work 40+ years, save diligently, and hopefully invest wisely with the goal of retiring and happily living out our ‘golden years.’ But just as with actual mountain climbing, our pursuit to scale the
mountain of financial well-being is fraught with uncertainty and risk. From time to time, we will encounter adverse economic and geopolitical environments during which the market becomes focused on a host of headwinds that cause it to pull back sharply. That was undeniably the case this past quarter as uncertainty quickly became the predominant theme of 2022.

Going into the new year, we wrote that “with the stock market priced for perfection and the backdrop of low interest rates likely to fade, we expect more moderate equity returns and a likely increase in volatility” (TelosGram January 2022), and we positioned our clients’ portfolios accordingly. Our outlook played out pretty much on schedule during the first quarter. One element of surprise was Russia’s invasion of Ukraine, which added another layer of complexity and dented our global economic outlook, largely due to the sharp increase in commodity prices, which is negative for growth and will likely spur further inflation. That said, history suggests that these types of events, which are devastating from a human and humanitarian standpoint, tend to have a fleeting market impact unless they lead to a recession. Nevertheless, our thoughts are with Ukrainians everywhere, and our hopes are for a swift end to this war.

Even though equity markets kicked off 2022 at an all-time high, the S&P 500 index quickly plummeted nearly 12% into ‘correction’ territory - defined as more than a 10% pullback from its last all-time high - by late February amid persistent inflation concerns, expectations for Fed rate hikes and escalating geopolitical tensions. It was the benchmark index’s fifth-worst January-February period in history, while bonds had the second-worst ever start to a year, according to BlackRock. While past performance isn’t indicative of future results, investors should find some comfort knowing that 78% of the worst starts for stocks ended with positive returns over the next 10 months (see top graph above). Supported by optimism for a ceasefire in Ukraine and easing commodity prices, markets staged an impressive rebound in March, which cut the S&P 500 index’s year-to-date loss by more than half to 4.9%. The Dow Jones Industrial Average and the Nasdaq Composite lost 4.6% and 9.1%, respectively, over the past three months. Within the stock market, sectors that are traditionally considered defensive have been holding up better than the S&P 500 as a whole.

Stock market declines are the last thing most investors want to experience, but they are an inevitable, fairly common part of the investment cycle and generally have limited long-term implications. In fact, a correction of at least 10% has happened about once every 19 months, on average, going back to 1928. Since 1980, the S&P 500 has experienced an average peak-to-trough decline of 14% in any given year. While the declines have varied widely in intensity, length, and frequency, the market still managed to end the year with a positive return more than three out of four times (see bottom graph above, courtesy JP Morgan).

Stock market volatility - the frequency and magnitude of price movements, up or down - was extremely elevated during the first few months of 2022, with roughly half (49 percent) of the trading days through early March seeing the S&P 500 move higher or lower by at least 1 percent. That surpasses the COVID-related spike in volatility seen in 2020 and is the highest level since the Global Financial Crisis in 2008 (see top graph below).

At its March meeting, the Federal Reserve started a new tightening cycle by lifting the federal-funds rate from a near zero level for the first time since 2018 as it grapples with spiraling inflation, astonishingly low unemployment, rising wages, and economic growth that is quite strong. After keeping its benchmark interest rate anchored near zero since the beginning of the pandemic, the policymaking Federal Open Market Committee (FOMC) raised rates by a quarter percentage point to a range of 0.25%-0.5% in an effort to tame the worst inflation since the 1970s. Inflation (a general increase in the overall price level of goods and services that decreases the purchasing power of money), which polling shows to be Americans’ top concern, appears to be getting out of hand. Propelled by surging costs for gas, food and housing, the consumer price index(CPI) jumped 7.9% over the past year, the sharpest spike since 1982 and likely only a harbinger of even higher prices to come.

While the Fed’s initial rate hike was modest, Fed chairman Powell telegraphed that larger and more frequent increases could follow if inflation doesn’t begin to decline soon. Policymakers are also discussing when and how fast to shrink the Fed’s massive $9 trillion (!) in bond holdings, a step that would have the effect of tightening credit for consumers and businesses. Such moves mark a sharp turn away from the central bank’s ultra low-rate policies, which it enacted when the pandemic erupted two years ago.

The idea behind raising rates is simple: higher borrowing costs can slow down inflation by tempering demand. Borrowing costs are already much higher than they were just a few months ago, with the average rate for the key 30-year fixed mortgage, which reached a record low of 2.65% in January 2021, topping 4.5% for the first time since the end of 2018. The central bank is walking a tightrope, however, as it seeks to achieve a ‘soft landing’ by raising borrowing costs enough to slow growth and tame high inflation without tipping the economy into recession. Russia’s foray into Ukraine just made that balancing act even more complicated.

Investors hope that the Fed will successfully engineer such a soft landing, but history tells us that it’s a very difficult feat to accomplish in a rapidly growing inflation environment, especially for today’s policymakers who have been behind the curve for months. There have been 16 monetary policy tightening cycles in the United States, United Kingdom and Europe since the late 1970s. Thirteen of those ended in recession according to Capital Economics. Chances are that getting inflation back to the central bank’s 2% target will require much higher interest rates and poses a greater risk of recession than the Fed or markets now anticipate.

Hopes for a soft landing for the U.S. economy also faded in the bond market where yields - which move in the opposite direction of bond prices - rose at their fastest pace in years; and prices extended their losses that stretch all the way back to the beginning of 2021. The yield on the 10-year Treasury note, a key market benchmark, briefly exceeded 2.5%, up from 1.63% at the start of January, while the yield on the 2-year Treasury note jumped to 2.35% from 0.79% at the beginning of the year. After posting a negative return of 1.7% in 2021, the Core U.S. Aggregate Bond index, which measures the performance of the total U.S. investment-grade bond market, carried over its losses into the new year and showed a negative total return of 5.93% in the first quarter.

Amid some of the highest inflation readings in decades, investors have started to price in a rapid series of interest rate increases by the Fed, which caused yields on short-term Treasuries to climb more quickly than on longer-term bonds and briefly resulted in an inverted yield curve - the slope of interest yields on bonds of increasing maturities - for the first time since September 2019. An inverted yield curve is often seen as a signal that investors are more concerned about the immediate future than the longer term, spurring interest rates on short-term bonds to move higher than those on long-term bonds. It has historically been a fairly reliable indicator that the economy is on the verge of entering a recession, as every downturn in the past 60 years was preceded by an inverted yield curve, according to research from the Federal Reserve Bank of San Francisco. Even so, Powell recently pushed back against those concerns, saying that “the probability of a recession in the next year is not particularly elevated.”

How much of the rise in interest rates has effectively discounted the Fed’s expected tightening campaign will depend on the course of inflation and whether it stays stubbornly high or will decline to more reasonable levels. Stubborn inflation will likely mean more tough sledding ahead for bond market investors. On the other hand, history shows that bond markets rarely string together several down years in a row and there are reasons for bond investors to feel hopeful that modestly better times are ahead for the remainder of the year (see bottom chart this page, courtesy Fidelity).

Perhaps most importantly, bonds have a long history as a consistent ballast in a diversified portfolio during risk-off periods. Even in extreme periods of market dislocations,
such as the Global Financial Crisis in 2008/09 and the more recent COVID-19 market turmoil, the price decline of bonds has been magnitudes lower than the benchmark S&P 500 Index. Thus, abandoning an allocation to bonds in favor of stocks due to fears of rising rates can significantly increase a portfolio’s risk and lead to suboptimal investment outcomes.

As investors were looking for ways to protect and diversify their portfolios from the escalating geopolitical crisis in Ukraine, safe havens, such as commodities like oil, natural gas, and wheat, along with defense stocks and gold got a boost. Russia and Ukraine are top global producers of commodities, particularly wheat, oil, gas, and metals. Together, they account for about 29% of global wheat and 19% of corn exports.


The stock and bond markets had a volatile first three months to the year and navigating this uncertain environment has been anything but easy for investors. Surging inflation, Fed rate hikes, an inverted yield curve and the ongoing war in Ukraine jolted investors back to the harsh reality that market pullbacks happen regularly in the investing cycle. Clearly, this has been an intensely bearish few months during which indexes entered into correction territory and then rebounded sharply. And it appears that markets will remain choppy for the foreseeable future as wild swings are often a sign of more wild swings to come.

Still, while the growth rate for the U.S. economy is expected to slow, there is no sign of an overall economic collapse or even a sharp contraction. In light of Russia’s invasion of Ukraine, which is challenging an already fragile world economy, GDP growth expectations for 2022 have been downgraded to 3.0% from 5.7% last year, but those rates remain higher than recent historical averages. Likewise, corporate revenue and earnings expectations for 2022 are more subdued than for the previous year, yet Wall Street still expects the S&P 500 to post earnings per-share growth of 7.9%, according to FactSet. Positive earnings growth should support stock market performance. For now, consumers are flush, corporations are in hiring mode, the jobless rate declined to a post-pandemic low of 3.6%, and the domestic economy remains fundamentally strong.

As investors, we cannot control the market, but we can control for risk and manage expectations. Simply avoiding big losses can be much more important to your long-term investment strategy than capturing maximum market gains. You don’t need a calculator for this one: to recover a 50% loss requires a 100% gain!

Being uncomfortable with volatility is totally normal. Here are a few steps that can help you weather the storm and keep you on track to meet your long-term goals:

  • Expect and accept market volatility. Markets are volatile by nature. Expect to encounter bouts of market volatility from time to time and accept it as a normal part of investing. Understand that acting emotionally can be more harmful than helpful.

  • Have a solid longer-term plan that you can live with. Focus on your short- and long-term financial goals and determine if you’re still comfortable with them. Strike a comfortable balance between risk and return, then stick with your plan and stay invested.

  • Review your risk tolerance and your risk capacity. Risk tolerance is your ability to emotionally handle big price swings; risk capacity is your financial ability to take a loss.

  • Make sure you have a diversified portfolio. Properly diversifying portfolios across asset classes is key to increasing your odds for investment success. It can help mitigate market risk and is intended to provide a more consistent, less volatile investing experience.

  • Rebalance your portfolio as needed. Market weakness can provide portfolio rebalancing opportunities, which involve selling appreciated securities to buy depreciated ones. This can increase the future return potential of a portfolio, as well as keep an investor’s risk profile aligned with long-term goals and objectives.

  • It takes Patience and Discipline to adhere to a strategy and to avoid making costly mistakes that keep you from meeting your long-term goals.

  • Work with a Financial Advisor. Whether you’re new to investing or a seasoned investor, a trusted Financial Advisor can be a great partner to help you avoid short-term thinking and navigate through periods of market volatility with personalized advice for your particular investment situation. Investors working with Financial Advisors tend to make better decisions and are more confident about reaching their goals. As an added benefit, studies show that people who work with a Financial Advisor are generally happier than those who don’t (2021 Consumer Financial Behaviors Study by Herbers and Company).

Long-term investing, like mountain climbing, is a journey with no shortcuts to success. Edward Whymper’s poignant reflection on climbing rings ever true: “I can say, climb if you will, but remember that courage and strength are naught without prudence, and that a momentary negligence may destroy the happiness of a lifetime. Do nothing in haste, look well to each step, and from the beginning think what may be the end.” We believe that the same is true for successful investing: it requires us to be alert to the many risks we encounter along the way while maintaining a constant vision of our long-term goals, whatever events are placed in our paths. Remember, without getting down safely, getting to the top really doesn’t matter! APRIL 2022