Just What is Going on With the Stock Market?
For those of you have heeded our advice the last few weeks and not looked at your portfolios, we have news for you – the stock market has been absolutely terrible. The losses (on paper) are very much reminiscent of March 2020. Just about all equities and bonds are significantly down in January, with a few exceptions like energy stocks/funds. Technology, which has been the star performer over the last two years, is now leading the way down while more defensive cyclicals (big and boring, as we call sometimes call them) are down but not quite as bad.
Before we talk about what to do at times like this, which will feel a lot like what not to do, let’s try to understand WHY this is happening and why it’s happening right now.
This is definitely a perfect storm of external and often related factors which have come together right now:
Ongoing and worsening inflation. Lots of causes for this inflation, but clearly not transitory. A little inflation is a good thing but the 5%+ we now have, probably not.
Federal Reserve planning rate hikes and stopping bond purchases. Raising rates is the lever the Fed has to help curb inflation because it slows the economic growth by making it more expensive to borrow money. Over time, the higher rates will translate into higher interest rates for our cash reserves but that good part will take a while.
Covid 19 variants are here and will likely continue to be here. The hope we all had to have Covid behind us by now is clearly not happening. We are learning how to live with it because we have to!
Mixed to lower corporate earnings. It’s corporate earnings time and although the majority of companies which have reported to date have actually reported strong results, which were consistent with expectations for Q4, 2021, the forward outlook for most of these companies has disappointed analysts and investors. See bullets above!
The Ukraine/Russia conflict. The market, much like all of us, doesn’t like uncertainty and the conflict in eastern Europe is certainly creating plenty of that.
So now what?
As one of the financial pundits said this week, his best advice is to “sit on your hands and do nothing.” That’s easy to say and hard to do, so let’s expand a little:
Do not look at your portfolio every day. We are watching and we will let you know if we see something which requires your immediate attention. Markets go down. It’s hard to watch but if markets didn’t go down, there would not be any risk. And without risk, there is also no gain.
At the same time, think about how your stomach feels right now. If you are very nervous, let’s re-evaluate your holdings and consider reducing the risk as the market improves.
Ensure that your cash reserve is fully funded so that you do not need to sell holdings at a loss to fund expenses. This action will keep the losses on paper! But of course, if you have bonus dollars sitting in your checking account, think about whether you may want to invest some of it. Some good buys right now! Fund your cash reserve first.
And remember we are always here to talk and answer questions.