January 25, 2022
It has been a challenging start to 2022 for the stock market. January is on pace for the worst month since the pandemic started in March of 2020. We have seen days with significant volatility and all three major indices on average down 10%. We wanted to take a moment to reflect on why this is happening and what we should do in response.
Why is This Happening?
When the pandemic first started, the Federal Reserve (often referred to as ‘the Fed’—is the central banking system for the United States and works to help ensure our financial system supports a healthy economy) pushed interest rates lower to spur the economy and encourage Americans to spend/borrow money. The initial goal of stimulating economic growth helped pull us from the depths of the pandemic and now they are seeking to reduce the economy’s reliance on their support. The flood of money that the Fed pumped into our economic system has contributed to the rise in prices of food, energy, homes, and financial assets, AKA, inflation.
As we move on from the worst of the pandemic issues economically, the Federal Reserve is working to increase interest rates to combat inflation—new data has shown that inflation has hit its highest level in four decades. These suspected interest rate increases coupled with supply chain disruptions and the potential for conflict in Ukraine have created uncertainty within markets. When markets are uncertain, we are certain to see increased volatility.
What Should We Do?
Panic, sell all our stocks, and stash the money under the mattress? Probably not. In times like these, it is best to remind ourselves why we own stocks in the first place: we own stocks for the next 5, 10, 15, 20, or 30 years—to be the main driver of your investment returns and to provide the opportunity for returns that outpace your savings account and more conservative assets. We don’t own stocks for the next week, month, or 6 months—if you have a short-term purchase coming up, the money earmarked for that purchase shouldn’t be invested in stocks to begin with.
Over the past couple of years, we have been lulled into the idea that markets only go up—unfortunately they don’t. Quality investments, with discipline and time tend to offer consistent returns over the long-term. But, every investment, regardless of quality, will go up and down in the short-term. It is important to not succumb to the short-term volatility that markets present—that is likely to jeopardize your long-term goals. Rarely does buying an investment today have the potential to derail your retirement plan for the next 10, 20, or 30 years down the road—but selling all your stocks because of short-term volatility could.
Reasons for Hope
News and media outlets breed panic—it is our job to help offer some perspective. It isn’t all doom and gloom, there are some encouraging signs for our economy and reasons to continue to hold your investments for the long-term.
Covid-19 cases staggered to new highs amid the spread of the omicron variant. New York was one of the hardest hit states and over the past two weeks New York has been reporting a declining number of new cases. This is leading to hope that the other areas of the United States could see a similarly quick wave.
Thus far, corporate earnings have seen strong results. There have been some disappointing earnings from some high-profile companies, but almost ¾ of all companies that have reported so far have beat Wall Street’s expectations.
Finally, the unemployment rate is back below 4% and other measures of economic growth are positive—despite being a little slower than they were in 2021.
Below are links to our most recent podcasts that discuss several topics in this article.
Wade Into Wealth
Episode 58: Are You a Myopic Investor? – Do you check your investments on a daily basis? We discuss how the practice of looking at your portfolio each day could have a negative impact on your future goals and investment returns.
Episode 59: What’s Up With the Stock Market? – What has caused the stock market top drop this year, and what should you be doing about it?
Episode 60: Bills – Chiefs and the Pain of Loss. – A heartbreaking loss by the Buffalo Bills to the Kansas City Chiefs has left a pit in our stomachs. It's often true that losses hurt more than wins - in both sports and with our investments. We can't change the outcome of the Bills game, but we do have more control when it comes to our investments.
Points of Interest
- Our office will be closed in observance of the following holidays during the first quarter of the year: Monday, February 21st – President’s Day
As a reminder, if you would ever like to take a distribution/withdrawal from one of your accounts, please call the office to request the distribution. For security purposes, we do need to verify your identity to process any distribution.