Question: When I opened my January 2022 statements, I was surprised to see my portfolio lost value compared to the month before. What happened?
Answer: We all know that investments – especially stocks – go up and down in value. Still, it comes as a surprise to many investors when they open their monthly statements and see that their portfolio is worth less than it was the month before.
Understanding the January pullback
But in fact, most investments did lose value in January. The benchmark S&P 500 Index, which tracks 500 of the largest and most iconic American companies, lost over 5% in the month of January. Some of the largest and fastest growing companies, many in technology and other innovative sectors, were hit even harder and lost almost 13% for the month. Even staid government and municipal bonds lost ground. The only bright spots? Energy and commodity prices perked up in January, generating positive investment returns for those sectors.
Your own results depend on your individual portfolio mix. More aggressive portfolios, with a higher percentage of stocks, and especially growth stocks, would have been down more. Conservative portfolios, with fewer stocks and more bonds, or value-oriented stocks, would have held up a little better. But almost every corner of the market was affected by the pullback.
What caused the pullback
There are always several reasons behind a pullback. First of all, we remind investors that periodic pullbacks are perfectly normal, and tend to occur at least once per year on average.
Read our previous article:
Take A Deep Breath. Market Pullbacks Are Normal
But the current market unease stems largely from surprisingly high inflation numbers and the threat of higher interest rates. The Federal Reserve is expected to step in at its March 2022 meeting and raise interest rates in a bid to slow rising prices. That combination of higher inflation and higher rates can trip up corporate earnings and derail stock prices, especially those of high growth technology and other companies that won’t become solidly profitable until years into the future.
What should I do now?
Remember that temporary losses are both normal and expected. They occur each time the markets experience a pullback, and as we know, markets routinely go up and down. That’s just part of a normal cycle. Pullbacks are temporary in nature, and may last a few days, a few months, or even longer in the case of a true recession.
But historically, market prices rebound after the pullback, and typically continue to climb to new highs. That’s happened after each correction and recession in modern American financial history, including the Great Depression and the 2008 financial meltdown.
Don’t forget there is often a silver lining to a market pullback. It helps reveal some of the relative investment bargains that can be found far away from last year’s pricey big tech stock leaders. Many investment experts see opportunities among foreign, value and quality dividend-paying stocks, small-cap companies, and others.
Seasoned investors know not to react too quickly when markets get volatile. We recommend you stay invested, stay diversified, stick to your allocation, take moderate profits, and control what you can – namely, your spending and your retirement savings. Our job is to help you reach your long-term goals and make your money last as long as it needs to. That means not sweating the short-term, and making intelligent decisions and smart tradeoffs between potential risk and return in a constantly changing market environment.