Good Afternoon,
As I was pondering how to title this blog post, I decided that it would have been far too easy to go the doomsday route. In spite of all the bad news thrust upon us each and every day, it is good to remember that nothing stays the same for long. Winter becomes spring, the economy expands and contracts and the stock market goes up and down...and back up again.
It is understandably challenging to take a positive outlook right now. There is a horrific war going on in the Ukraine, China is on the verge of another Covid lockdown, inflation is at a 40 year high and money is about to get a lot more expensive as interest rates rise. Why are these issues affecting the stock market? Well, the stock market hates uncertainty. We don't actually know how the war in Ukraine is going to impact the global economy. We know that if China has to impose severe lockdowns again, it will have an impact on the global economy. There could be more disruptions to the supply chain. How high will inflation go? How much will the Federal Reserve increase interest rates? How fast will they increase rates? We can only guess at the answers to these questions.
All of this uncertainty has caused investors to sell. Usually in volatile markets bonds are a safe haven. Not this time. In a very unusual turn of events, bonds have been caught up in the wave of selling and are posting negative returns this year (last year too!). Today, however, the market soared. Federal Reserve Chairman, Jerome Powell, announced a half a percent interest rate hike. The market rejoiced since there was fear (here's that uncertainty again) that the Fed would increase rates even more. Chairman Powell indicated that raising interest rates by more than a half a percent at one time wasn't in the cards. We are expecting additional rate hikes this year though as the Fed does their best to curb inflation while at the same time avoiding recession. It may be a delicate balancing act.
We had become quite accustomed to seeing gains every time we looked at our portfolio. Especially last year when portfolio returns were in the double digits! Suddenly we are seeing our account balances decline and it sometimes causes a visceral fear response....SELL!!!! That's a real thing by the way....it's called loss aversion. Behavioral scientists have found that the pain of a loss is more strongly felt than the pleasure of an equivalent gain. It is because of this loss aversion that we might start to believe that selling and "waiting out the market volatility" is a good idea. Staying the course, especially during periods of market volatility, is the best possible strategy for us long term investors. Here's an example; In 2020 the S&P 500 lost about 34% between February 19th-March 23rd. By August the S&P had not only recouped all losses but it went even higher and finished the year with significant gains! If an investor pulled out of the market at the lowest point that year, they would have missed out on the biggest part of the rebound which took place over a few short weeks (between April and May 2020).
We had also become accustomed to "cheap money." Interest rates have been unusually low for years now, making large purchases like homes and cars much more palatable. Home equity lines of credit and loans were an easy way to pay for home improvement projects, especially with interest rates at 3% or lower. Demand for just about everything has been high while supplies have been low. Supply chain interruptions were mostly due to Covid lockdowns and quarantines. Too much demand and too little supply has resulted in an overheated economy. Increasing interest rates is one of the tools that the Federal Reserve utilizes to cool the economy. If you're in the market for a home or a car, now is the time to buy as interest rates are still relatively low. The average mortgage rate over the last 30 years is nearly 8%. The average national mortgage rate is now just over 5%. If you keep balances on your credit cards, consider paying them off as quickly as possible.
Even with all of the uncertainty in our world today, there is one thing I can guarantee....the market will go up and it will go down. We have been here before. In the words of Joan Crawford, "this ain't my first rodeo." It's not fun but down markets do present great investment opportunities.
Finally, to end on a positive note, there is much to celebrate. Corporate earnings have been impressive, unemployment is very low and most people have returned to the way they lived life before the pandemic. American consumers are back to traveling, shopping and working out like it's 2019!
To all of you Mom's out there, I wish you a very happy Mother's Day!
Happy Spring,
Johanna