FINANCIAL MARKET UPDATE 12.7.2021

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

THE COST OF SITTING ON THE SIDELINES

The emergence of the new Omicron Covid-19 variant has sparked some volatility in recent trading sessions. The S&P 500, which represents large stocks in the US, has dipped as much as 3.5% and experienced its 3rd largest single-day decline of the year on Black Friday (-2.27%). While that selloff is not dramatic by historical standards, there has been a notable deterioration in investor sentiment.

It’s not uncommon for investors to want to take some sort of action during periods of heightened volatility. Watching a portfolio balance drop is emotionally taxing, and it may be tempting to try and sidestep a potential upcoming correction. Unfortunately, investors often pay a high price while attempting to avoid short-term pain.

The chart below from Dimensional Fund Advisors (DFA) illustrates this cost. Based on their calculations, $1,000 invested in the S&P 500 in 1990 would have grown to $20,451 by the end of 2020 (the top bar). That is some significant wealth generation! Observe what happens if an investor were to have missed the best single day of performance during the period. The ending value would have been a materially lower $18,329 (the second bar). With each incremental handful of the largest daily market gains missed, the impact on ending wealth is significant.

Source: Dimensional Fund Advisors

Its also important to remember that in order to successfully time the market, an investor has to be correct twice. They must accurately anticipate continued price declines prior to selling and then reinvest ahead of the eventual rebound. Getting the first step correct is a challenge, but the second step is a doozy.

If an investor were to sell in anticipation of a correction but the market continued to rise instead, there would be a loss in terms of missed appreciation. If a correction did, in fact, occur after the sale, the investor must then have the guts to repurchase those assets while the market is down/falling. This is often much easier said than done.

Unfortunately, there is no special signal for when it’s the right time to re-enter the market. Recoveries can occur swiftly and without warning. This can leave investors still on the sidelines with a feeling that they missed the boat and keep them there indefinitely, which may be the worst possible outcome. Missing some of the best days in the market can significantly reduce wealth creation. Not being invested in the first place will eliminate it altogether. The best option is to invest in a portfolio that allows you to stomach volatility and avoid all of these guessing games in the first place.

WEEK IN REVIEW

  • New data published last Friday showed the economy added 210k jobs during November, relative to expectations for 573k. Despite the large miss, the unemployment rate fell by 0.4% to 4.2%, while the labor force participation rate increased to the highest level since March 2020 (61.8%).
  • Recent public comments from Fed officials, including Fed Chair Jerome Powell during last week’s congressional testimony, foretell a potential shift in monetary policy. It appears the Fed will debate accelerating the pace of tapering at the next FOMC meeting on 12/14-15, which could open the door for earlier rate hikes. The Fed will also publish an updated Summary of Economic Projections at the conclusion of their next meeting. This closely watched document summarizes individual forecasts for GDP, inflation, unemployment and the level of the benchmark interest rate in the coming years.
  • Economic data to be published this week includes job openings/quits on Wednesday, initial jobless claims on Thursday, and November CPI on Friday.

ECONOMIC CALENDAR

Source: MarketWatch

HOT READS

Markets

  • Tech IPOs Have Been a Bad Bet in 2021 – All But One Are in Bear Market Territory (CNBC)
  • Job Growth Disappoints in November, With a Gain of Just 210k, Despite High Hopes (CNBC)
  • High Inflation, Falling Unemployment Prompted Powell’s Fed Pivot (WSJ)

Investing

Other

  • Personal Data Is Worth Billions. These Startups Want You to Get a Cut. (WSJ)
  • The Cloud Decoded (Scientific American)
  • Bowl Schedule 2021-22: Complete List of Matchups, Dates and Times (SI)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 12+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership as well as analytics and operational efficiency for the Firm's Financial division. He lives in Omaha, NE.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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