After a three-year rally, the U.S. stock market has recently experienced some volatility and downward pressure. It’s always important to take a longer-term approach to market investments.
In addition to the recent stock market volatility, inflation has been causing concerns. The Federal Reserve is expected to raise interest rates in the spring, potentially slowing the economy and keeping inflation in check.
In writing for Dynamic Wealth Advisors, Kostya Etus, CFA® Head of Strategy, Dynamic Investment Management, had this to say:
“Why is the market down?
- Recency Bias: Not every year can be 2021. The S&P 500 returned close to 29%, had one brief 5% drop, rock bottom interest rates, and continued stimulus. Many investors have gotten complacent with such favorable market conditions, and any negative news may have an exaggerated reaction.
- In the short term, the market is driven by fear, not fundamentals. 2022 has welcomed us with rising interest rates as expectations for tightening and rate hikes from the Federal Reserve have spooked investors in what may simply be a knee-jerk reaction.
- Transitory Period: We are transitioning from a period of astounding economic and earnings growth to more stable levels. Last year, we had almost 50% growth in corporate earnings and a rebound for the economy. There will be some growing pains as we move closer to long-term trends.” *
Our advice is to take the following steps:
It’s important to put current conditions into perspective. This is not the first time the market has taken a tumble, and it won’t be the last. Declines in the Dow Jones Industrial Average are fairly regular events. In fact, drops of 10% or more happen about once a year on average:
Ride Out the Uncertainty Storm
It’s important to remember that markets dislike uncertainty. Currently, there are a lot of unknowns regarding the continued coronavirus pandemic, inflation, interest rate hikes, tensions between Russia and Ukraine, and earnings reports due out for several large technology companies.
As a result, we are experiencing higher volatility. The VIX, or the market volatility index, is at the highest level in nearly a year. As we get more information, day-to-day market fluctuations will likely decrease.
There’s an old saying that the best thing to do when you meet a bear market is the same as if you were to meet a bear in the woods: play dead. While easier said than done, successful long-term investors know that staying calm during a market correction is important. We don’t know whether the current fears will translate into an official correction, but the risk always exists.
Market volatility has increased in recent years, and the media can often make it seem like each episode is worse than the one before. In reality, volatility does not hurt investors, but selling when the market is down will lock in losses.
Maintain a Properly Diversified Portfolio
Fears about inflation, volatility, and market declines are stressful. However, it is important to keep in mind that having a properly diversified portfolio comprised of stocks, bonds, and other assets can be designed to work together to decrease overall volatility. Consider your specific portfolio, investment horizon, and circumstances when reflecting on economic events. If you have questions about your portfolio, get in touch with our office.
We’re Here for Your Friends and Family
If you have friends or family who need help with their investments, we are happy to offer a complimentary portfolio review and recommendations. We can discuss what is appropriate for their immediate needs and long-term objectives. Sometimes, speaking with a financial advisor may help investors feel more confident and less concerned with day-to-day market activity.
Erickson Braund is the Founder and Chief Financial Officer at Black Walnut Wealth Management. He is a Certified Financial Planner®️ professional and a Chartered Retirement Planning Counselor®️. Eric brings over 20 years of experience working with high net-worth individuals and families, helping them achieve their goals of protecting and growing their wealth for retirement and for generations to come. Because Eric is a CFP®️ professional, he adheres to high ethical standards and engages in at least 30 hours of approved continuing education in the financial industry each year.
Braund is an investment advisor representative with Dynamic Wealth Advisors dba Black Walnut Wealth Management; all investment advisory services are offered through Dynamic Wealth Advisors. This material is not intended to be used as tax advice. Each taxpayer should seek independent advice from a tax professional.
*This material has been distributed for informational purposes only. All investments carry certain risk and there is no assurance that an investment will provide positive performance over any period of time. Past performance is not a guarantee or a reliable indicator of future results.
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