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Thoughts On Recent Market Volatility & How to Handle It

Feb 15, 2022
Yields for You
Thoughts On Recent Market Volatility & How to Handle It
6:54
 

It’s normal to feel a little anxious when the stock market turns volatile. Seeing your account balance swing around more than usual can make you question your investing strategy. But it’s at those critical times when you must recall that volatility is normal and expected – selling out due to fear proves to be the wrong strategy time and again. Moreover, using pullbacks in the stock market to add to your investments often proves to be lucrative over the long run.

Still, we should acknowledge that we are going through some unprecedented times. There are countless risks from inflation to interest rates to geopolitical turmoil. Nobody knows how the future will turn out.

Here are the risks we are monitoring. We’ll wrap up with how you and I should navigate the current market.

How will inflation play out? Is it transitory or permanent?

We’ve all seen the headlines that consumer prices have been rising at the fastest clip in 40 years. While it’s unsettling to see grocery prices and the cost of a gallon of gas climb day by day, I have some encouraging news: Just recently, it was announced that one-year inflation expectations decreased for the first time since October 2020.[1] There is light at the end of the inflation tunnel once we get through the first few months of this year. While some inflationary pressures will be permanent, as supply chains ease with the passage of the Omicron variant, items such as cars and even some food prices should drop in price. Wages could still be high though. (But that is not the worst thing in the world, right?)

What is going to happen with the Russia/Ukraine situation? Are oil prices going to skyrocket?

Flip on cable TV, and you will probably see some analysts talking about the geopolitical risks around Russia/Ukraine. Nobody knows exactly what will happen, but historical stock market returns are not that bad when these sorts of issues hit. It’s the “not knowing” that traders do not like. And coping with elevated energy prices is not ideal for the stock market. For the economy, the conflict likely means higher gasoline prices for you and me, but perhaps not much else. It is possible that some areas of the stock market – like defense companies – might even benefit.

Why are stock and bond prices moving so much regarding the Federal Reserve’s plans to hike interest rates? What does that mean for me and the economy?

The market now anticipates that the U.S. Federal Reserve to hike interest rates up to seven times in 2022, leading to a 1.75% effective Federal Funds Rate by year-end. That means the cost of borrowing will be higher. The upshot? You can earn a bit more on your savings account by the end of the year. Moreover, the market has already discounted higher interest rates – we can see that in the current Treasury yield curve. So, the shock to the system perhaps won’t be as blunt as you might think.

Will all these issues lead to a recession in 2022?

Economists are not forecasting a recession this year. Even if real GDP growth does turn negative, the contraction likely would not be anything like what we endured during the 2008 Great Financial Crisis. Nor would it be similar to the shock of the Covid Crash of 2020. A year of a bit slower economic growth should be compared to last year’s stellar 5.7% growth rate – that was the best expansion since 1984. A dip in activity should be expected after such a strong 2021.

That is a lot of uncertainty for the market (as well as you and me!) to digest. It's important to think about how strong investments have been in the last few years. A global basket of stocks was up 26% in 2019, 16% in 2020, and 19% last year. While nobody can predict the future, maybe we are due for a shaky 2022. It is during the uneasy times that sticking by a sound investment plan, as outlined in your Investment Policy Statement, is the most important. These gut-check moments can be ideal times to re-evaluate your risk tolerance, too.

 

[1] https://www.reuters.com/business/us-consumers-inflation-expectations-lower-january-ny-fed-survey-finds-2022-02-14/

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