Domain Money Advisors, LLC | 5/5/22
If you’ve been following the markets closely, you’ll know that April and the beginning of May was a tough period, for both stocks and crypto. The S&P 500 is down 8.4%, the Nasdaq 100 dropped 13.7% and Bitcoin fell 20% -- all since the end of March. While these types of drawdowns are infrequent, and certainly difficult, we asked the investment team at Domain Money Advisors to share a few thoughts around the current market volatility.
What’s causing the recent turmoil in your view
Many of the factors that contributed to volatility during the Q1 2022 period continued putting pressure on markets in the first months of Q2. The recent downturn was primarily driven by the following reasons:
Inflation. The CPI grew 8.5% over the year ending March 2022, well above the Federal Reserve’s 2% target. Additionally, oil price levels remain elevated, mainly due to the Russia/Ukraine war. High inflation creates burdens for companies and individual budgets, which in turn plays out in financial markets and economic growth.
Rising interest rates. As interest rates rise, expected future earnings from companies become less valuable. Additionally, the cost to borrow money increases for companies and households. The Federal Reserve increased the fed funds interest rate by 0.50% in their May meeting and markets are projecting the fed funds rate to reach 2.75% - 3% by year’s end.
Mixed earnings. Companies like Microsoft announced strong earnings but others have not fared as well. Netflix’s earnings report showed a reduction of 200k subscribers and the stock price subsequently fell nearly 45% since, Amazon reported its slowest growth since 2001, and Apple announced that supply chain issues will likely reduce revenue by between $4B and $8B over the next quarter. These announcements have dampened expectations about future growth for these companies and beyond.
The crypto market has continued to display elevated correlation with the stock market. As the above factors resulted in lower stock prices in April and May, this has translated into lower crypto prices as well.
What is your investment philosophy in this environment?
We still believe in focusing on finding attractive long term investment opportunities. Therefore, in many ways our investment philosophy remains the same – looking at stocks and cryptocurrencies with a 3-5 year time horizon. When markets are volatile our view is to attempt to (1) evaluate the underlying cause of the volatility and then (2) adjust our investment positioning consistent with any changes to our long term thesis on a case-by-case basis.
We continue to be believers in our holdings based on this long term view. Additionally, we believe that the adoption and innovation path of blockchains and cryptocurrencies has not changed in light of recent events. Periods of market volatility can be frustrating, but they also can present opportunity. We are starting to see new opportunities developing based on a long-term perspective.
Is “staying the course” a way to respond to this market volatility?
As a general principle, given our long-term thesis, we believe that investors that invest within their risk tolerance and stay the course and remain invested in the market will be best served in the long run. Based on our recent study of the markets, over the last 12 years the S&P 500 has gained 56% of days, 60% of weeks, 71% of months and 91% of years, which in our view demonstrates that staying invested is one way to potentially enhance returns over the long run.
Additionally, timing the market is extremely difficult. Dollar cost averaging is a tool that many investors employ to invest through market ups and downs. The potential benefit of dollar cost averaging is that through a disciplined approach, investors can buy assets over time including when they trade at cheaper valuations.
In a recent study Domain Money, Inc. conducted with more than 1,000 randomly selected consumers, we learned that 34% of the investors surveyed claim to utilize this useful strategy.
This information is provided for informational and educational purposes only. Domain Money Advisors, LLC (“DMA”) is an investment adviser registered with the U.S. Securities and Exchange Commission and an affiliate of Domain Money Inc. (“DM”). The information contained herein is not investment advice nor intended for any investor or type of investor and does not constitute an offer to sell, a solicitation of an offer to buy or an offer to purchase or sell any securities or cryptocurrency, or investment product or service. While DMA believes that the information contained herein is reliable and derived from reliable sources, it makes no representation, warranty or undertaking, stated or implied, as to the accuracy or completeness of the information. DMA and DM expressly disclaim any liability or loss incurred by any person who acts on the information or ideas discussed. Investing comes with inherent risks and volatility and you should always invest within your means and risk tolerance. No representation is made that any investor will achieve its objectives or will make any profit or avoid losses. Past performance is not an indication of future returns and you should always consult a financial advisor prior to making investment decisions. Cryptocurrencies involve exposure to higher volatility. Please see important disclosures at https://domainmoney.com/legal
* Domain Money Advisors, LLC, an investment adviser registered with the U.S. Securities and Exchange Commission and an affiliate of Domain Money, is currently recommending the following assets contained in this communication as part of Managed Strategies: AMZN, NFLX, AAPL, NFLX *Important disclosures: Price and market information is sourced from Yahoo! Finance and DM Advisors analysis