What’s happening with the markets? This is always a loaded question, and it’s never just one factor.
Thus, let’s focus on what we believe are the primary factors, and those are inflation and rising interest rates. As we all know by now, prices for just about everything have skyrocketed – up about 8.6%, on average, over the past 12 months. Inflation at this level isn’t good for anyone, so the Federal Reserve is doing what they can to help bring this under control. More specifically, their objective is to delicately bring down consumer spending (i.e. “demand”) to allow “supply” to catch up. By bringing the supply/demand relationship back into balance, we would expect prices and inflation to gradually regulate. Simple macroeconomics here.
Of course, the logistics of accomplishing this are anything but simple. One of the primary methods for quelling consumer spending is to raise interest rates. By raising rates, less money is borrowed, which (theoretically) will then lead to decreased spending by businesses and, ultimately, decreased spending by all of us as consumers. The delicate aspect of this process by the Fed is to walk the fine line between increasing rates fast enough to get prices/inflation under control, but also doing it in a manner that doesn’t cause our economy to retract too far and end up in a deep recession. There is no blueprint for this, but the Fed is doing what they feel is best to navigate this balancing act.
Since World War II, we’ve seen a recession about every 5-6 years – this is part of our economy’s nature and lifecycle. Keep in mind that a “recession” is technically defined as 2 consecutive quarters of negative Gross Domestic Product (GDP). In other words, two quarters of negative growth in our economy. It’s worth noting that Q1 2022 already showed negative GDP (-1.5%), so if Q2 also ends with a negative GDP, a recession would have technically occurred. It truly means nothing more than that, so don’t let the term scare you. If you want to educate yourself a little more about recessions, check out this article from Kiplinger… Recessions: 10 Facts You Must Know.
If we have entered a recession, that does NOT indicate any specific performance of our stock market, although common sense says it would cause market values to decrease (and they already have). Because one of our last recessions (the 2nd worst in our history, compounded by a financial system crisis) brought a -57% drop in our markets, some people seem to believe that is what a “recession” means, but it certainly does not. The chart below shows the performance of the S&P 500 before and after the past 12 recessions, which can help put things into better perspective:
Source: https://finance.yahoo.com/news/history-stocks-recession-102913314.html
And by the way… “bear markets” (defined as when the stock market goes down more than 20% from its peak) are also very common. As you’ll see below, they happen about every 6 years. The key point here is that everything we are currently experiencing is something we have seen many times before. These are normal occurrences within our economic system – expansion and contraction are just part of the cycle. Don’t let your brain, the media, etc. make it into anything more than that! For reference, the S&P 500 is currently down about 22% from its peak (the NASDAQ is down over 30% since its peak).
A few key reminders if you’re a saver:
1) Don’t stop contributing to your 401(k) or IRAs… Dollar-cost averaging could be your friend and your future self will thank you. This could be your opportunity to buy these investments at lower prices (buy low / sell high). Consider increasing your contributions if you can afford to. Volatility like this can be our friend!
2) There is a BIG difference between losing “value” and losing “money”… And you don’t lose “money” unless you sell something for a loss. Values of our investments change every day. Don’t lock in a loss if you still have many years until you need the money in retirement. Buy high / sell low is not a winning strategy!
3) Don’t panic… Panic is not a strategy either! Be patient and wait out the storm. Markets have always recovered from bear markets, and there’s certainly no reason why we would expect otherwise in this situation.
4) Don’t chase performance… Trying to find the high flyers in times of trouble could easily backfire on you.
A few key reminders if you’re approaching (or in) retirement:
1) Always maintain a % of more conservative investments in your portfolio/bank (3-5x of your annual need from your assets) that are not subject to the wild swings of the stock market. We call these your “conservative buckets”, and it is these buckets that could help provide for your income need during an extended market downturn. This also allows you to maintain a more growth-oriented bucket invested in the stock market for the longer term and to help protect against longevity risk. When markets go down, you won’t be forced to sell those at a loss since you’ll be using your conservative buckets for your needs.
2) The recent market volatility has reminded us that even defensive investments like bonds can be negatively impacted (albeit not to the degree of stocks). So when you are building out your conservative “buckets”, be sure you build out a bucket of cash as well.
3) If you are still saving for retirement but haven’t built these buckets out yet, one strategy to consider would be to begin directing your future savings to the conservative options of your 401(k)/IRA without changing your current investment mix. Most 401(k) and IRA accounts will let you change where just your future deposits are invested. This could help improve your peace of mind as you enter retirement.
Ultimately, this is one of those moments where we have to ensure our emotions don’t override reason and prudent planning. While the media creates frenzy and nervousness, and the numbers on your statements are down, what matters most is that you have a sensible strategy to navigate this volatile market and the inevitable ones to come. By just having a strategy, you can significantly reduce the fear and uncertainty that surrounds these types of events.
