An Update on Market Volatility
“Shifting Gears”
I hope you all enjoyed a happy new year and holiday season. I’m sure that many of you are aware that the markets are in a downturn. During times like this you’ll no doubt hear about and recall deeper market pullbacks. Investors understandably have fears of the dot-com bubble of 2000 and the 2008 financial crash happening again.
It’s not that challenging market events like the above can’t happen or won’t happen again, it’s that most pullbacks aren’t remembered at all. The majority of declines are known as market corrections (-10%) or mild bear markets (-20%). History shows that market corrections occur in about 2/3 of all calendar years. These moments are painful during the dip but are quickly forgotten as markets broadly rebound and recover. I believe that we are in the middle of a short-term shifting of gears for markets and not any type of broad crash.
Part of this shift is related to interest rates. The Federal Reserve will likely raise interest rates 1 or more times this year. Whenever the Fed “lifts-off” and begins raising rates, it’s common for markets to adjust. Equity markets sometimes drop around 10% when rates start to rise. Although markets anticipated some Fed tightening this year, new troublesome covid variants have extended supply chain issues longer than expected and therefore have caused inflation to potentially be longer lasting and less “transitory”. Despite recent developments, I still believe that inflation is mostly transitory and related to covid distortions. The problem is that we don’t know how long these distortions will last. The Federal Reserve feels like it needs to raise rates to bring inflation under control sooner rather than later.
Generally, I believe that inflationary trends pre and post covid are likely to be more deflationary than inflationary. This is due to technology, birth rates, and immigration, which I may discuss in a future commentary. What this means is that I don’t expect this entire rate hiking cycle to get very far before the Fed stops or slows the increases. During the prior cycle, the Fed Funds Rate topped out at 2.5% in December 2018 and quickly went back to 0% in March 2020. Even with the recent inflation spikes, longer term 10-year inflation expectations have remained between 2-3% over the past 12 months. I agree with this and do not believe that inflation is likely to be a long-term primary concern for markets. I don’t believe the Fed hiking rates to reduce inflation is anything like a paradigm shift for markets, but I view it as more of a short-term tapping of the brakes.
A 2nd part of this changing tide is hopefully the bursting of a bubble. I believe the broad equity market to be healthy and resilient with strong, attractive earnings potential. Even though big technology names have become a larger part of the S&P 500 and Nasdaq indices, I don’t think that these technology names are like the 2000 dot-com bubble. Many of these large tech names have the best balance sheets in the world and are extremely profitable. Back in 2000, the internet and web stocks were the future, new frontier. It’s not surprising that most didn’t survive back then; however, tech nowadays is the current proven economy and not some future vision.
I do believe that speculative “meme stocks”, SPACs, and some Crypto/coin markets are a closer comparison to 2000. These investments and the stories around them are less proven. Covid unfortunately brought about a resurgence of day-trader investors that flooded the market in speculation. These investors typically aren’t buying investments that they believe in for 5-10 years but are instead trying to pump up a name and quickly sell the stock. I believe that some of this day-trading speculation is beginning to wash out of the space as markets normalize post-covid. I view some of these speculative declines as healthy, necessary, and a return to normal. In the short-term, it may also have the effect of pulling broader markets down with it.
Many of our clients know me as an optimist, and I’m still very much optimistic about stock markets. My optimism is mostly due to longer-term trends that are unrelated to our near-term covid related distortions. I personally haven’t sold any holdings during the decline and neither have many of our clients. I’m sorry that these moments are painful, but I’m hopeful and confident that markets will rebound. Some individual names and companies do come and go, but broad markets have literally always recovered. Below is a chart that shows how markets can and do recover from challenging world events.
If you’re concerned during this time of increased market volatility then please reach out to us. If you want to go over your long-term financial plan then we’d be happy to review the details in person or by zoom. If you need money from your account in the near-term then we likely planned accordingly and should be able to take from positions that haven’t declined as much. We will continue to monitor your accounts and make careful adjustments.
Disclosures:
Investment Adviser Representative offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA / SIPC, a broker-dealer and registered investment adviser. Cetera is under separate ownership from any other named entity.
The views stated in this letter are not necessarily the opinion of Cetera Investment Services LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.