Market Update – 1/7/2022

The market fell sharply on Wednesday on news that the Federal Reserve may raise interest rates and accelerate tapering in March. Technology stocks were the most affected. The ARKK ETF (which mainly invests in high-growth technology stocks) fell 7.1% on Wednesday, marking the biggest drop for the ETF since September 2020.

Goldman Sachs’ prime brokerage department aggregated data and found that hedge funds have been selling high-growth, high-value stocks since December 2021, and further accelerated the selling of software and chip manufacturing stocks this year.

Bond prices also began to fall along with stock prices, and news of a possible rapid rate hike by the Federal Reserve led to a jump in U.S. Treasury rates, sending global bond markets lower. The common conception of an inverse relationship between stocks and bonds may no longer hold true.

The maximum drawdown of S&P 500 in 2021 is only 5%; however, statistics show that when the decline of S&P 500 in a previous year is less than 6%, the maximum decline on the current year will be an average of 13%. The average annual return in this case is a modest 7%.

The excellent performance of the stock market in 2021 has given investors the illusion that holding 100% allocation in stocks is safe, but most investors cannot afford severe market fluctuations. Asset allocation is still the key to ensuring that investors will not buy high and sell low due to emotional factors.

Stocks and bonds are a simple and effective way to manage risk. In the long run, especially during a recession, better quality bonds (such as U.S. Treasuries and investment-grade corporate bonds) can still provide buffer when the stock market declines.

Investors who need further diversification may wish to ask professional managers to design a more complete investment portfolio. Global financial asset allocation is no longer exclusively for ultra-high net worth clients.