Recent Market Volatility
We’ve been warning clients about heightened stock market volatility due to the potential effects of, among other things, two rally busters: inflation and higher interest rates. We got that volatility in spades in January with the S&P 500 touching correction territory for the first time since March 2020. The technology-heavy NASDAQ was hit even harder.
Tensions in Eastern Europe have prompted worries of war, economic disruption, and energy shortages. In addition, forecasts for a slowdown in US economic growth are widespread prompting stagflation fears. But the key issue for investors right now is the Fed’s new found aggressiveness coupled with the concern that they’re late to the inflation-fighting party.
Historically, investors enjoy further stock market gains for as much as a year after the Fed’s first interest rate hike (in this case, likely mid-March); however, the volatility and declines we’ve seen from the equity markets in January indicate investors are worried that he Fed waited too long and will have to do more than previously expected to tame inflation.
Due the unique nature of the pandemic, there is a high level of uncertainty surrounding the inflation numbers. There is a growing view that, despite hitting levels not seen since the 1980s, the data is backing a narrative that inflation has stopped accelerating. It’s probable the easing of supply chain bottlenecks and the overall normalization of global economies (alongside the work of Fed) will keep inflation from running away.
Most economists see the 2022 US growth rate in the 2%-3% range, which would be back to “trend.” Due to slowly improving supply chains and continued strong consumer demand, we fall on the high side of that range, and ask “is 3% really that bad?”
The answer is no. We’re slowing, but still growing. The 2022 US economy will provide ample opportunities for satisfactory corporate profits, and as the year progresses, higher stock prices.
It's best to maintain your long-term strategy and allocations at times like these. Remember: Periods of volatility or correction are the price to be paid for the added return from equities. Since 1926, the average bear market (defined as a drop of 20% or more) lasted 1.3 years and the decline average -39%. In contract, the average bull market lasted 7.2% years and gains average 387%. Trying to execute a wholesale stock market exit and re-entry is a maneuver that is mostly fumbled to the investor’s detriment.