No, the point of this article is not to gloss over a weak start to 2022 by equities. Just a few days into the new year and it's becoming clear advisors will have to do some client hand-holding as interest rate speculation is pressuring stocks.
On Tuesday, the Nasdaq posted its worst one-day performance in nearly a year and nearly 40% of the Nasdaq Composite Index is at least 50% removed from their 52-week highs. That's almost a record and not the kind investors want to hear about. Translation: Growth stocks aren't off to the greatest of starts in the new year.
Compounding concerns about equities is that the S&P 500 and other widely followed domestic equity benchmarks entered 2022 at valuations that in no way are inexpensive. Some beloved names, including Apple (NASDAQ:AAPL), are contributing to that frothiness.
“At its current multiple of more than 31 times forward earnings, Apple is now at a 42% premium to the S&P 500 compared with its five-year average premium of only 4%,” reports Dan Gallagher for the Wall Street Journal.
However, the issue facing advisors this year is that it's likely to be risky to ignore or underweight stocks.
TINA Still Here
More than a decade ago, Jason De Sena Trennert, chief investment strategist at Strategas Securities, coined the phrase “there is no alternative,” colloquially known as “TINA.” Given the interest rate outlook for 2022, TINA is a relevant as ever.
“You’re not going to be able to get 20%-plus just for showing up in the next three years,” Trennert tells Morningstar. “It’s hard to get bearish on stocks, but I do think people should manage their expectations.”
While valuations shouldn't be ignored, high or low multiples alone are not reasons to buy or sell securities. Fortunately, the fundamental picture for stocks is attractive and that can ease clients' nerves as 2022 unfolds.
“The past year was one where the underlying fundamentals for the stock market were strong. The economy and corporate profits boomed as we emerged from the worst of the pandemic shutdown and the world’s major central banks kept a foot on the accelerator to ensure the recovery sped along,” according to Morningstar.
Fortunately, there are some corners of the equity market today that are backed by decent fundamentals and somewhat tolerable valuations. On that front, small-cap value stands out. That's good news in terms of client conversations and allocations because it's a familiar factor combination and one with mostly favorable history on its side.
“The rest of the market is either fairly valued or, in the case of the large, fast-growing companies that have dominated returns in recent years, meaningfully overpriced,” notes Morningstar.
TINA Time Is Now
It might be frustrating to advisors and clients alike, but TINA isn't likely to expire this year. Simple bond market math confirms as much.
As advisors know, bond yields and prices move inverse of one another. Some clients know this, but what many clients don't know is exactly how destructive interest rate hikes can be, even for supposedly less risky Treasuries.
Say a client buys $1,000 worth of 10-year Treasuries and rates are 100 basis points (1%) higher in a year. That $1,000 will be $925 following rate tightening.
That's just example of why TINA is likely to loom large again this year, whether we like it or not.