Putting the Last Few Days Into Perspective
It looks like the capital markets are not having a happy new year.
If you turned on CNBC lately, you have no doubt seen a lot of red numbers flash across the screen. We have seen some very swift and dramatic market volatility over the last few days and weeks.
But this is not a time to panic.
Domani Wealth is here to walk with you through this volatile market environment and answer any questions you may have. Let’s talk about what is happening, and more importantly, what it means to you.
What is happening in the markets?
As of market close Tuesday, January 25th, we are seeing negative returns across just about every area of the equity markets. The broad S&P 500 Index is down (8.6%) since the beginning of the year. The Nasdaq Index (a barometer of the technology sector) has fallen (13.5%) and is now in correction territory.
Intraday market movements have also been very volatile. Over the last two trading days (January 24th and 25th), some areas of the capital markets have been deeply negative mid-day, only to turnaround finish with a positive daily return. Buyers are obviously stepping into the market on dips, which is a positive sign.
However, not all areas of the market are created equal, and some categories are performing better than others. For example, value stocks (usually dividend payers) are holding up better than stocks in the growth category. Also, non-U.S. stocks are generally holding up better than U.S. stocks.
Also, interest rates have been increasing over the last few weeks in anticipation of The Federal Reserve easing their bond purchases and perhaps raising the key benchmark interest rate (Fed Funds Rate) in the next few months. This is resulting in a more challenging fixed-income environment as well.
What is causing this volatility?
As is often the case with swift downward movements in the capital markets, there are a few things coming into play at the same time.
The situation in Russia and Ukraine is causing investors some angst. Russia has sent more than 100,000 troops, along with tanks and military gear, to Ukraine’s borders. Also, this week the U.S. Embassy in Ukraine has advised Americans to leave the country. The potential global and economic impact of a Russian invasion of Ukraine is causing some of the market movement over the last few weeks.
Inflation and Interest Rates
It is not a secret that inflation has arrived. Everyone is having to open their wallets a little wider when going to the grocery store and the gas pump. In an effort to curb inflation, the Federal Reserve has indicated that they will be pulling back some of its stimulative policies. This includes raising the key Federal Funds rate, which is currently at record low levels. While the Fed is not expected to raise rates until mid-year, this could change based on economic data. But the markets are already accounting for the shift and interest rates have been moving steadily higher lately. Rising interest rates are favorable in that it allows investors to earn more interest on bank and savings accounts and also buy bonds at higher coupon rates. However, rising rates can also result in challenges in the fixed income market as investors are able to purchase newly issued bonds at better interest rates than bonds they may already own.
Government Stimulus Slowing and COVID Concerns
We would be remiss if we did not mention the ongoing COVID pandemic. After a spike in COVID cases around the holidays, it appears new cases are waning somewhat, but we are still dealing with the economic ramifications of the past two years. Job opening numbers are still a much wider gap than labor force availability, we still face some supply chain shortages, and much of the government stimulus is coming to an end.
Focus on the long term
You may think all of this paints a rather bleak picture. But we need to remember that there will always be headwinds in the capital markets.
Could we see more equity market volatility in the future? Most likely. Will interest rates continue to move higher? Probably. Is this something we have been expecting? Absolutely.
While the general trajectory of the markets is positive over the long term, there are always bumps in the road along the way. Take a look at the chart below which shows the broad S&P 500 Index with the dark blue line. You can see how over the longer term, the market movement is positive. The blue shaded bars represent bull market periods and the red shaded bars represent bear markets. You can see that the number and size of the red bars are much smaller than that of the blue bars.
This tells us that there will inevitably be periods of negative returns in the markets. There will be bumps in the road. But the general long-term trend is positive and making rash decisions in response to short-term market movements is not in an investor’s best interest.
What Should I Be Doing?
While it is completely normal to ask questions when the markets fluctuate so greatly in a short period of time, there is no need to panic or make rash emotional decisions about your portfolio.
However, it may be a good time to pause and consider a few items.
- Have your financial goals or risk level changed? Do you have any new goals? Has your time horizon changed? Please reach out to us with any changes to your financial situation.
- Review your cash needs. Do you have large expenditures in the future that we need to consider when managing your portfolio? Has your cash flow situation changed? It is important to keep us informed of any cash needs you may have in the future. When the markets are volatile and you must sell investments to raise cash, you may be forced to sell at inopportune times. If your cash needs are known, it is a good idea to plan for these ahead of time.
- Last but certainly not least, don’t let emotions rule the day. While it can be unnerving to see the markets swinging by such large amounts, it is important to remain focused on the big picture. Do not make irrational decisions in times of market stress. The key to long-term investing is to maintain a diversified portfolio with an asset allocation that is in alignment with your financial goals.
Side by Side
Rest assured Domani Wealth is here to answer your questions and calm any anxieties. As your advisor, we are here to walk side by side with you through times of market volatility.
We aim to provide our clients with perspective and help them to remain disciplined on the path to their financial goals.
We are here for you and it is our pleasure to speak with you about your portfolio or financial plan. Please do not hesitate to reach out to us if you have any questions about the market environment or your financial situation. Our goal is to come alongside you and support you on your financial journey to realizing your goals, and we know how important it is to have peace of mind on that journey. We appreciate your trust in us and are always here to help.
By Angela R. Berkosky, CFA, Chief Investment Officer
Sources and Footnotes:
Source for index data: Bloomberg. Bull and bear markets as defined by Yardeni Research.
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