We expected more stock market volatility in 2022 and that was on display this week.
Stocks fell sharply in the middle of the week after news broke that Russia was invading Ukraine. This was a big story and stocks didn’t like it. The S&P 500 was down as much as 6% on the week on Thursday morning.
However, the buyers saw an opportunity and quickly stepped in. The S&P 500 launched a big reversal on Thursday afternoon and Friday and actually finished the week with a small gain. Take a look at the 5-day chart of the S&P 500 below.
The big rebound helped pair stock losses on the year.
- After being down as much as 14% on the year, the S&P 500 (SPY) is down 8% in 2022.
- The tech heavy NASDAQ 100 (QQQ) is down 14% on the year.
- The Vanguard Global Stock Market Fund (VT) is down 7% on the year.
- iShares MidCap Stock Index (IJH) is down 6% on the year.
- iShares SmallCap (IJR) Index is down 7% on the year.
This weakness in stocks in 2022 has been driven by three key factors.
Rising interest rates: The Federal Reserve is raising interest rates to try and fight high levels of inflation. Rising interest rates isn’t a death sentence – but historically rising interest rates weigh on economic growth and stock gains because it reduces the amount of cash flowing through the economy and markets. Look for the Fed to be trying to raise interest rates for most of the year.
Inflation at a 40-Year High: Inflation just clocked in at a 40-year high. It’s very real and I know everyone is feeling it. High inflation is hurting consumer spending and that is a big drag on economic growth.
Political Uncertainty: The global political situation is volatile. Russia just invaded Ukraine and that makes stocks nervous for lots of reasons.
Is There Anything to Feel Good About?
Despite weakness in the broader stock market, food and energy stocks have been thriving in 2022. In fact, these have been the best performing sectors of the year so far.
- Devon Energy (DVN) is up +21%
- ConocoPhillips (COP) is up +24%.
- The Andersons (ANDE) is up +12%
- Bunge (BG) is up +12%.
These stocks are doing well because inflation is driving commodity prices to new multi-year highs. For example, the price of oil just hit $100, its highest level since 2014. Take a look at the 35-year chart below.
The price of corn just hit a new 5-year high. Take a look at the 5-year chart below.
When commodity prices rise, the companies that control those markets have historically done well. We are seeing that play out now with food and energy stocks.
Looking forward I see commodity prices rising for the rest of the year and the plan is to sit tight with our investments in food and energy stocks and look for more upside.
What Should We Expect Moving Forward?
The stock market has its challenges right now. I am expecting more volatility in the short run. But in the long run, I am still expecting stocks to finish 2022 with a decent gain.
- Global economic growth is slowing in 2022 from 2021, but the global covid economic recovery is still in play. The global and US economies should both deliver respectable growth in 2022 and that is good for stocks.
- Investors are still eager to buy dips in stocks, we just saw that this week with the big reversal.
- Some tech sectors look over valued, but other stock sectors such as food and energy still offer incredible value. Value sectors are pulling new capital into U.S. stocks and stock funds.
Even though stocks are down on the year, I actually think they are doing a pretty good job of hanging in there in the face of some bigger challenges that I mentioned above.
The plan is to stay invested in current holdings, and look to deploy extra cash when stocks or bonds are down.
I’ll be back next week, have a great day!
Disclaimer: This report is for entertainment purposes only. Every investor should consult with an investment advisor before making investment decisions. The Vodicka Group, Inc. is not a broker/dealer. We do not receive compensation for mentioning stocks. At various times, the clients, publishers and employees of Vodicka Group, Inc., may buy or sell the securities discussed for purposes of investment or trading.
Author Michael Vodicka owns shares of Devon Energy (DVN), Conoco Phillips (COP), The Andersons (ANDE) and Bunge (BG).
