We are starting to phase into a post-pandemic world, which has been great for all our health and safety. Mask mandates are starting to disappear, and the retail economy is starting to become busy once again. While this has been good for the overall economy, it has not translated exactly to the stock market. There are a couple reasons for this:
For starters, high multiple growth stocks that carried the market success over the past couple years, are starting to see pull backs. This is partially attributed to the rapid growth seen during the pandemic, that was unsustainable for a lot of these companies. Many of them are having to reset their growth estimates and targets, due to the fall in demand as we start to transition to a post-pandemic world.
Secondly, we have seen hyper-inflation numbers over the last 9 months that were 30-year highs. In January, used car prices were up 42% on a one-year trailing basis. Sharp rises in electricity costs and gas prices were at a rate that hadn’t been seen in 10 years. The amount of inflation we have seen is partially due to the amount of stimulus that was poured into the economy during the pandemic. Supply chain issues have also been a contributing factor as well.
To try and combat inflation, the Federal Reserve has responded by raising the federal funds rate, which is an interest rate used by banks to borrow with each other. By doing this, it creates an environment where other interest rates rise in conjunction, such as treasury rates, mortgage rates, individual loan interest rates. The reason the Fed does this is to try and slow the amount of borrowing/spending of consumers and cool the rising prices that are overheating the economy.
What does this mean for your investments? If you are an investor with a long-time horizon (+5 years), then we believe you have little to be concerned about. If you are a younger investor who is saving money for your future self, times of downturns and volatility in the market can be great opportunities to add to your portfolio and be investing at lower prices. It is the perfect example as to why many of you may be investing every month (or dollar cost averaging) into your portfolios right now. Downturns in markets can be scary, but I think this graphic is a great visual for young investors to get comfortable with.
If you are an investor who has a shorter time horizon or may even be taking distributions, then this is not a time to panic, but a time to sit down and think about your risk comfort level. We believe that while there is a lot of uncertainty in the market right now, a lot of the concerns are priced in to the values of stocks and bonds already. Another thing to remember is short-term volatility is normal, but so are market recoveries. The table below shows the dates in which the S&P 500 has declined more than 10% and for how long those corrections lasted for:
In behavioral finance, the loss aversion theory states that investors feel much more strongly about losing money than they do gaining the same amount. For example, you would feel a greater level despair and concern if you lost $20, than the joy or excitement you’d feel if you found $20. Combining this with market recency bias can be something investors struggle with during times of uncertainty. Therefore, it is important to remember that staying calm and collected during difficult times will help you make rational decisions rather than emotional ones. Market environments like these are the best time for you evaluate your risk tolerance and make sure you are comfortable with the assets in your portfolio.
If you have questions or would like to talk more about your risk profile and how your portfolio is positioned, as always, please reach out.