After a 2021 for the global markets which felt like an episode of “Who Wants to be a Millionaire,” 2022 has felt more like “Fear Factor,” according to new analysis.
Indeed, 2022 has presented a worst case scenario for global investors, with equally disappointing returns across both stocks and bonds amid stubbornly high inflation, global interest rate hikes, recessionary fears, war in Europe and a rising US dollar.
Yet challenging markets often present opportunities for patient investors, according to Strategist Dan Lefkovitz, and bright spots may exist for those who look a little harder. He points out some of these potential opportunities in his recent market analysis:
1.Stay Invested. In times of extreme market volatility, fear can take over and investors may want to run for the exits. Yet research on money-weighted returns, which adjust for asset flows, show that investors tend to mistime their purchases and sales, buying high and selling low, failing to reach their full return potential.
2.Take a Fresh Look at Your Asset Allocation. In times of market turmoil, the former “cool kids” of asset allocation may not look so cool anymore and curious investors may be rewarded by examining less obvious areas of the market. For example, the Morningstar MLP Composite Index, which identifies master limited partnerships involved in the transportation, storage and processing of oil, natural gas and other energy sources, rose 22% in the first three quarters of 2022. Leveraged loans are another bright – or at least less dim – spot this year, with the Morningstar LSTA US Leveraged Loan Index down just 3.2% through September 30 as compared to a 14.6% decline for the Morningstar US Core Bond Index. Investors are enjoying unprecedented yields today as well, with the Morningstar US Core Bond Index yielding 4.7% as of September 30, up from 1.7% at the beginning of the year.
3.Go Shopping. According to Morningstar Equity Research, when assigning fair value estimates to more than 1,500 stocks in the US and globally using long-term discounted cash flow modelling, the market was roughly 20% undervalued at the end of the third quarter. The last time we saw such a discount was in the first quarter of 2020 during the global pandemic sell-off.
Dan Lefkovitz, Index Strategist, Morningstar
“The fourth quarter of 2022 could see further declines in asset prices. Losses could even continue into 2023. But eventually, equity prices and fair values should converge, and higher current bond yields are positive for both income and future total returns. Investors would do well to remember that all previous downturns have given way to periods of capital appreciation that more than compensated for short-term losses. In hindsight, we may look back at the losses of 2022 as a pothole in a long, upward-sloping road.”
To speak with Dan Lefkovitz, reach out to Tim Benedict at tim.benedict@morningstar.com or (203) 339-1912.
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