Market Volatility- Is This Different?
The ebbs and flows of the market, although uncomfortable, are a normal part of the economic and market cycle.
So why does this feel different? Despite some setbacks at the onset of the pandemic, US equity markets in recent history have been consistently positive. The last significant shock to the financial system occurred over a decade ago. Think back to the financial crisis. That is the last time the S&P 500 had losses in one year (2008) of over 30%. Since then, there have only been two years in which the S&P 500 finished with modest losses. Further, since 1980 the S&P 500 has had 9 years of negative market performance compared to 32 years of positive performance.
So what variables contribute to market volatility? Traditionally the market is cyclical. As inflation increases the Fed will increase interest rates which will reduce the availability of capital, cooling down the market. If GDP is lower than standards set by the Fed interest rates are lowered to encourage capital flow. The Fed has not been faced with current levels of inflationary pressure in decades. High inflation is bad for consumers and bad for business. The Fed will have the delicate task in 2022 of determining appropriate rate increases hoping to control inflation. Fed Chairman Jerome Powell referenced current inflation pressure as a “severe threat” to a full recovery from the effects of COVID 19. Rising inflation will also fuel more cautionary behavior by investors. When market volatility presents itself typically investors sell stocks and, in this case, specifically tech stocks and crypto currency. Investors will flock to safer investments like treasuries. Rising interest rates can impact bond prices but will improve yields on your cash and bonds.
Should I make any changes? Our appetite for risk becomes more apparent when faced with market volatility. Make sure you have assessed your financial plan and that your allocation is appropriate for your financial goals. Your success as an investor is largely tied to sticking to a strategy long term. Look for opportunities to tax loss harvest and find more competitive cash rates.
Hamilton Walker Advisers believes that portfolio optimization starts with an investment strategy that matches your financial goals, and an asset allocation that spreads risk across the market. We believe that a good long-term investment is less about a single stock or crypto win and more about finding complimentary asset classes across your allocation.