I’m dropping you a quick note to talk about what’s going on within the markets.
Well, it happened. Like suggested in our earlier letters regarding continued market volatility this year, markets continued their wild ride, and here we are. Stocks slid into bear market territory after a bad May inflation report showed that prices rose at the fastest pace since 1981.1
It’s clear that the Federal Reserve’s efforts to cool inflation haven’t borne fruit yet, and investors are nervous. In response to these concerns about inflation, the Fed raised the benchmark interest rate by another 0.75 points, the most aggressive hike in nearly three decades.2 Their move will hopefully yield relief from rising prices but also means the cost of borrowing will go up, which could dent business and consumer spending.
Should I be worried about markets?
Cautious, yes. Wary, perhaps. Afraid or worried? No.
- Many of the stocks leading the fall were highflyers during the pandemic, so the pullback could be a healthy correction of overblown prices.3
- Bear markets don’t last forever. On average, they tend to linger for roughly 15 months. However, the 2020 bear market only lasted 33 days.4
- Half of the market’s best days have happened during a bear market, so I expect some good days ahead.5
To give you some historical perspective here’s what happened during the last few bear markets:
You can see that in a couple of cases, markets bounced back within months. However, the 2008 bear market was a sustained pullback that lasted much longer. I contend, this is not 2008 and is nowhere close to it. Consumers balance sheets are healthy, banks are healthy, unemployment is at all-time lows, and job openings are great.
Is history always an accurate predictor of the future? Definitely not. But we can look to it for hints about what may come.
What happens next?
Markets will likely continue to be extremely volatile over the next weeks and months as investors digest the Fed’s aggressive rate hikes as well as concerns about an economic slowdown. The latest estimates still don’t point to a recession in 2022, but that could change. I personally feel a 2022 recession has very low probability. 6
On the other hand, the next rounds of inflation data might show that prices are cooling off, which could give the Fed breathing room and avoid more aggressive hikes later.
We’ll have to wait and see.
What should I do now?
Great question, I’m so glad you asked. First of all, never panic. Decisions made while in panic mode, typically aren’t your best ones. We’ve been expecting wild market behavior and we’ve prepared for it. With correct allocations and proper risk tolerances, we’ve always expected these types of markets would exist while being invested.
The absolute worst thing you can do right now is to hit the eject button and bail on your well thought out investment strategy. It’s impossible to perfectly time your reentry into markets and missing the ride back up could have a painful impact on your returns. Plus. market downturns may also create buying opportunities for selective bargain hunting if we stay flexible.
Bottom line: markets like these are natural, expected, and even healthy.
Natural, expected, and healthy… What could I possibly mean? Think of it this way. Natural forest fires are often associated with negative impacts on the environment. Can they be harmful? Absolutely! Think of those who have built their homes within the fires path. We must assume they knew there was a risk in doing so. But nonetheless, a risk they were willing to accept. Or maybe they didn’t realize the risk and only admired the view, because their friends had a great view and they wanted one too. We usually think of the fires damage and devastation it will cause to wildlife and vegetation, but a fire event can also be beneficial for our plants and animals. For example, fire: heats the soil, cracking seed coats and triggering germination. It clears the path of downed trees, unhealthy trees and can set the stage for new growth, healthy growth. It’s times like these when portfolios become battle tested. If you thought you built your home far enough away from the fires path, only expecting to see flames or maybe feel some heat. But instead, you found yourself inside the burning forest and the kitchen is now an outside BBQ Pit. Well, we may need to rethink things. But ask yourself, are you only feeling the heat, or is the house on fire. Most cases, it’s only a little heat. But under duress and panic, you may think your hairs on fire.
If you feel the need to sell or make drastic changes – please, please, please talk to me first.
Questions? As always, call or reach out to me.
P.S. Need a break from the markets? Watch jellyfish float at the Monterey Bay Aquarium.
The S&P 500 is an unmanaged composite index considered to be representative of the U.S. stock market in general. Returns based on closing price performance. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. For illustrative purposes only. Chart source: https://www.wsj.com/livecoverage/stock-market-today-dow-jones-bitcoin-fed-rates-06-14-2022/card/how-the-s-p-500-performs-after-closing-in-a-bear-market-yBwgfJwW8HGSNJaKg6LB
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