Recent Market Volatility - A Good Thing???
The stock market has kicked off 2022 with the biggest stock market drop since Covid hit in March 2020, with a nearly 10% decline for the S&P 500 in the first few weeks. It has recovered slightly but is still down about 5% for the year. However, this volatility doesn’t concern me and in fact, I welcome it. I’m not suggesting it’s fun to see account values go down, so let me explain two reasons for stating it’s welcome.
1 – Market corrections are normal. We’ve experienced generally stable markets over the last decade and can forget that ups and downs are a part of investing. According to the chart below by Capital Group, market corrections (generally defined as a 10% drop in the market) happen almost once a year on average, and bear markets (commonly defined as a 20% drop) happen about once every 6 years. I feel more uneasy when markets seem to do nothing but go up for long periods of time as that isn’t “normal” market behavior and I prefer a more normal ebb and flow.
Two – The reason for the volatility. For years the economy has been boosted by easy monetary policy in the form of the Federal Reserve injecting money into the system and keeping rates extremely low (around 0%) for years. On top of this, the government added trillions of dollars in stimulus funds as it tried to navigate the economic impacts of Covid. All this stimulus has boosted the economy resulting in historically low unemployment numbers, but can also have negative impacts, most evident with inflation at the highest level in 40 years. The balancing act of preventing the economy from slowing too much while also not overstimulating it is challenging. Personally, I feel the stimulus should have started to slow some time ago as I have concerns of the long-term impacts, likely to show up in the form of slower growth. The Fed is expected to tighten monetary policy by slowing the money they pump into the system and increasing interest rates, in a move towards policy normalization (anything with the word “normal” sounds pretty good to me these days). The analogy I’ve used is that they are removing the training wheels from the economy because it can ride without them. When you first remove the training wheels things may feel a little uneasy and it can be a wobbly ride, but ultimately, it’s a good thing because they really aren’t needed. This has caused the markets to be a little wobbly, but I believe will ultimately be a good thing. The charts below show how markets have performed historically, one year after the Federal Reserve starts raising rates and during tightening periods. Of course, there is no guarantee the market will be up one year after the first rate hike or throughout the cycle, but there isn’t a clear reason to run for the hills.
As always, if you have questions or would like to speak to me regarding your investment strategy, feel free to reach out at advisor@blakegallion.com.
