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There is more market volatility, inflation is high, we’re quickly approaching mid-terms, there’s bad news everywhere and everyone’s inner “DoomsDayer” is coming out of the shadows (some more than others!) So we thought it was the perfect time to break down how we interpret this year’s market volatility based on our research, thoughts and opinions.
The current stock market situation is dire, but so are conservative bonds. Even cash has gone down in value due to inflation. Everything is down except for commodities (oils, metals, etc.)
But things aren’t as bad as it feels.
October is historically a down month, which is typically followed by a “Santa Claus” rally. Mid-term years with first-term presidents also historically perform bad until the election is over or becoming predictable. Why? Because the market loves predictability. We’re hoping historical trends come through.
For all the bad news floating around out there, the economy itself is sounder than you think. We know it doesn’t feel that way because the markets are down, but companies are still making money, the jobless rate is at a historic low and economies are still coming back online from the pandemic.
Obviously, inflation is bad. It’s the primary factor affecting the overall economy right now. It’s a global problem, however, and not something that is only affecting us in the U.S. There’s a lot of blaming going around right now but inflation has been primarily caused by the pandemic.
Everything was shut down for an extended period, and supply chains and shipping lanes were disrupted. They have slowly all been opening back up, which is great, but supply and demand haven’t quite balanced out yet. A big issue right now is that even though prices are up, demand is still high. People are still willing to pay the high prices—as of right now & as of late—and that is a major contributor to even higher inflation.
There’s also a lot of geo-political risk right now. For example, Russia is using the leverage they have with inflation to make some moves to increase the pressure because they know the world relies on them for a lot of minerals and metals. China has also been a problem too. Their recent political decisions and motivations are being questioned and a lot of manufacturing is already being moved from China and taken elsewhere (i.e. iPhone is now made in India).
This is all contributing to inflation. But we think most of it is temporary.
Some of it is permanent. For instance, there is a trend in the workforce right now, due to Covid, that may stick around. Employers are looking for good, quality talent and the employees have more leverage to ask for higher salaries. This is a good thing, overall, for the economy, but it’s another factor contributing to high inflation.
One of the primary reasons the market is dropping right now is that the markets usually look to the future. Sometimes when they look to the future, they can be completely wrong, but sometimes they can look to the future and cause a self-fulfilling prophecy. The latter could definitely be a possibility here, but we just don’t know which way it’s going to go.
One could-be example of a self-fulfilling prophecy is the Fed Reserve’s recent moves. The Fed’s primary task is controlling inflation. However, they don’t know if it’s transitory (aka temporary) or permanent. IF it is permanent, it’s their job to contain it. They are motivated to keep their reputation intact, so that is causing them to come out with drastic moves like increasing the Fed Rate (aka interest rates).
If they are successful with their plans, it can perhaps do amazing thing for our economy. But if they’re wrong and they have raised interest rates too drastically or too quickly then it could throw us into a recession. We don’t know if this is the beginning of a recession or not, but if it does turn out to be a recession the economists seem to think it will be shallow.
However, the market doesn’t know that. People are going to panic anyway, and that’s why we’re seeing the sell-off right now in the market. Perception is everything.
The way rising interest rates could slow the economy is that when interest rates are higher, it makes it harder (more expensive) to borrow money to buy thinks like a home, a new car, a new TV, etc. Demand is supposed to slow down, de-stimulating the economy.
The Fed raised interest rates on purpose in order to control inflation, because–again–right now people are still spending, and demand is still high, causing inflation to rise. This strategy could backfire, though. You’ll find economists on both sides of the argument here.
The recommendation we give to our clients is to take advantage of this down market and throw any extra cash back into the market. Stock prices are low—there’s a giant sale! It never feels good or right to do this because it’s counterintuitive, but like Warren Buffett always says, “be greedy when others are fearful, and be fearful when others are greedy.”
What we advise against the most is a major shift from stocks to fixed income in the name of fear. It will lock in your losses, and you’ll potentially miss out on gains when the market does eventually come back up. You don’t want to be on the sidelines when it comes back—and we all know timing the market is almost impossible. If you ever find a Stock Market Crystal Ball, let us know!
One of our primary goals with clients is working closely with them to study their goals, time horizons and risk tolerances to do our best at putting them in investments that we think they can ride through the good times and the bad—investments that match their unique situations.
In bad times, it’s never a good idea to abandon ship.
Bottom line: inflationary periods have been historically good for stocks. It may be more stressful and bumpy, but if you think you can handle it, it could be worth the turbulence.
Written by Dustin Granger and Danielle Nava | Sept 28, 2022
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