It’s been a rough start to the year in US equity markets as rising interest rates and slowing economic growth have markets reevaluating their appetites for risk.

Since hitting an intraday all-time high on New Year’s Eve, markets decided that they would enter 2022 in a much more erratic manner. Volatility has come back with gusto, and many of the darling stock market winners of the past few years have seen a sharp reversal.

As we’ve consistently communicated over the past several months, we believe this is the start of a riskier time in financial markets. Choppiness is already present, and we don’t yet think markets have made it all the way through. We are being patient and do not believe now is the time to pile on risk.

Signs from Late Last Year

Some of today’s volatility can trace its roots back to the fourth quarter. A time when equity markets rose in aggregate, but changes were happening under the surface.

Worries about the trajectory of growth and the length of the economic cycle are causing certain very growth-oriented stocks to falter. The weakness first emerged around the brief bout of volatility around Thanksgiving, sparked in part by the emergence of the Omicron variant, and it persisted throughout the rest of the year.

Areas of the market that were high flying stars got too far out in front of their skis. Their stock prices were bid up on unrealistic expectations, and valuations—a measure of a company’s stock price to its underlying earnings power—became very expensive. Led by a sharp reversal from those hyper growth names, as of Monday’s close, US equities are sitting roughly 8% below all-time highs. By comparison, the growth-oriented Nasdaq Index is now off nearly 14% from its peak.

Lemons into Lemonade

Now is a time to be tactical and measured, and we believe this is the value of having well defined investment disciplines.

Financial market risks have been rising. The economy is entering a period of decelerating growth, inflation’s increasing, and the quantity of fiscal stimulus being poured into the economy is rapidly shrinking. We’re also at the point where the Fed is preparing to raise interest rates, adding another market concern to the economic wall of worry.

In markets specifically, elevated equity valuations and low bond yields have made for a difficult investment backdrop. Conditions have been getting less rosy for some time now, even if the catalyst for a correction remained unpredictable. It was into these conditions that last year, we began reducing risk in our multi-asset class portfolios, supported by our macroeconomic analyses and bottom-up processes.

Our approach for this correction is the same as it has always been. While we don’t yet believe we are at the point where we plan to make significant portfolio changes, should the selloff worsen, we will be looking at volatility as an opportunity to add value for clients.

Our research team continues to monitor these topics and more. If you’re interested in hearing more of our monitoring points and views on an array of investing themes, then subscribe to our insights.

This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. The reader should not assume that investments in the securities identified and discussed were or will be profitable.