January was a rough month for investors as they started the year in a selling mood. US stocks got the worst of it, with large companies declining about 5% and smaller companies falling nearly 10%. Outside the US it was about the same for large companies in the developed world, while emerging market stocks held up better but still fell nearly 2%.
Fixed income markets were also challenged, as rates kicked up across the yield curve. The change was most noticeable on the front-end of the yield curve (the 2 to 5-year range) with greater rises than the longer-end (the 10 to 30-year range). Yields for riskier borrowers also rose more than comparable year treasuries. To use some jargon, spreads widened. This, combined with equity market performance, is an indicator of risk appetite. Cash went from being trash to being king pretty quickly.
We wrote about the correction here, so we won’t rehash those thoughts in this update. We find it helpful when the market get rough to revisit first principles. One of the things we believe about investing is that over the long run, stocks tend to follow earnings and cash flows. We also observe there are periods of time and instances where that’s not the case (“meme” stocks, anyone?). It is worth noting that investor expectations tend to fluctuate more wildly than business fundamentals. Last year, expectations for many were high, and a good number of those companies could not measure up. Right now, we are in the midst of earnings season and expectations on the whole seem a bit more reasonable.