Chart of the Week (COW)

We often talk about the frequency of corrections, but sometimes it is helpful to see it in chart form. For this week’s COW, we are going to look at two charts. First off, let’s look at all the years over the past 7-decades that have included a correction in the stock market (S&P 500) of at least 10%:

As you can see, downward moves of at least 10% are not unusual. In fact, 38 out of the past 70 years have included at least one 10% correction, which is about 54%. Okay, the next logical question would be, how did the stock market do after the correction? For this, we will focus on the returns from when the market was down 10% to the end of the year, which is an imperfect measure (if the correction occurred right before the end of the year, there would be little time for recovery), but the best we have:

As you can see, most years (~2/3rds) saw gains into year end, while only a couple (1974 and 2008, which were in the midst of harsh bear markets), saw significant further losses.

COVID-19 Update

The number of daily cases remain at all-time highs with the 7-day moving average closing in on 3-million cases/day. To put this in perspective, before December 27, 2021, daily cases had never even crossed 1-million/day and we are now experiencing case counts 3x that number. Prior to the Omicron wave, COVID seemed in many ways anecdotal – many of us might have known one or two people who had gotten it, we may have even gotten it ourselves, but unless you worked on the front lines, the sheer number of cases were just numbers on a screen or on the news. With Omicron, while my immediate family has thus far avoided it, it seems that nearly everyone I know either has it, recently had it, or someone very close to them has recently had it.

January has already seen more cases worldwide than any other month during the pandemic; although, thankfully, the fatality rate remains well below prior spikes:

Canada has experienced a similar surge in cases (January is already the highest case count month here as well):

If we wanted to find a silver lining outside of the evident milder symptoms associated with Omicron, it would be a recent slowdown in the rate of change of new cases, which has augured a rapid reversal of case counts in the past.

Market Update

It has been a messy start to the year with all major indices in the red. The Omicron wave has bled into some concerns about growth, especially in the first half of 2022, with many names tied to reopening experiencing sharp selloffs. Further, concerns about rising interest rates have weighed on certain segments of the market, which has further exacerbated the downside moves.

We remain of the view that 2022 is going to be a decent year for stocks, but an uneven one. We are not concerned about weakness associated with Omicron, as we believe that we will ultimately get through this and anyone selling good quality businesses because of short-term concerns is missing the forest for the trees. We have bigger concerns about tightening monetary policy as more meaningful downside moves in the market are often associated with tightening policy (recall late 2018); however, these selloffs are almost always buying opportunities; albeit ones that demand patience.

We expect things to settle down next week as we are entering first quarter earnings season for most companies and we expect earnings to be strong, which should help to offset some of the other concerns that are currently plaguing the market.