A Few Thoughts about the Markets

2022 sure has been a rough one for both stock and bond markets. Fueled by fears of higher inflation caused in part by the Russian invasion, higher energy, Covid work stoppages the Federal Reserve has promised to raise interest rates and reduce bond holdings until inflation is reduced. Unfortunately, financial analysts use historical data to project whether the Fed can raise rates without putting the economy into a recession. To make matters more complicated, this time around the employment numbers continue to be strong and many Americans appear willing to spend on leisure and travel as well as their next home. In the meantime, interest rates on mortgages that most people rely on to buy that home have soared from 3% to up to 6% in a short time. Will higher mortgage rates simply slow the hot housing market and reduce prices or send it into a tailspin?

But is this really unusual? To date the S & P 500 (most recognized stock index) is down nearly 14%, considered a correction but not the 20% needed to be considered a bear market. According to a simple Google search, bear markets occur on average once every 3.6 years and not all occurred during a recession, only just over half. The tech heavy NASDAQ index is already in bear market territory.

The news is actually worse for bonds since many bonds are owned by more conservative investors hoping to avoid the volatility in stocks by accepting the lower returns of a more stable asset. Unfortunately, higher interest rates and especially rapidly rising interest rates are not good for bond prices leading to losses over 10% this year.

Final thoughts: the anatomy of this correction hasn’t been as unusual as you might think. Markets anticipate the future and very quickly especially now that computer programs are such an integral part of trading. When markets are rising, investors go from confident to expecting that prices will never go down resulting in a false sense of control and ability. The opposite is true of corrections. As markets fall, people lose confidence and sell, computer programs use technical analysis to add to selling pressure as do larger institutions hedging positions for protection or profits.

So, if things appear to be worse economically in the future why be patient and watch it get worse along with lower portfolio values? The simple answer is that it’s not that simple. First, markets anticipate the future as much as 18 months in advance. Second, external factors like Russia ending the conflict can spark a sudden reversal. Third, the Fed can see data emerge that allows them to slow their intended rate increases.

Bottom line: the near term is not long term. Investors focus long term despite the anxiety that being patient creates. That’s just being human.

The lower markets may affect your ability to make larger than anticipated withdrawals. Please keep us in the loop about your future plans so we can make provisions for your needs. By all means don’t stop living! Call us if you have any specific concerns or questions.