Mr. Toad's Wild Ride?
Markets cratered last week, heading into correction territory, and then bounced right back.1
And then continued bucking and kicking the next day.
Watching the markets lately reminds us a bit of Mr. Toad’s Wild Ride in The Wind and the Willows.
So, Let’s talk about what’s going on, and how investors should react.
(Scroll to the end if you just want our soothing takeaways.)
What led to the giant selloff?
A few things:
Fears around the Federal Reserve raising interest rates and what rapidly removing support could do to markets and the economy.2
Inflation worries (it's at a 40-year high).3
Tech earnings.4
A potential hot war in Ukraine.5
Bottom line: markets are being driven by fear, anxiety, and uncertainty.
Could we see a bear market or serious corrections in the weeks ahead?
Very possibly.
Corrections happen regularly and it wouldn't be surprising to see continued volatility or major drops.
Here's a chart that shows intra-year dips in the S&P 500 alongside annual performance to illustrate how often markets take a dive.
(Take a look at the red circles to see the market drops each year.)
The big takeaway? In 14 of the last 22 years, markets have dropped at least 10%.6
We're dealing with a lot of uncertainty and investors are feeling understandably cautious.
However, that doesn't mean we should panic; instead it is important to stick to a rules-based process.
Over the last few months our process led us to lower risk. This means we raise cash, shift to less risky stocks and add high quality bonds.
For some strategies we added gold and shorted stocks for the first time in nearly two years.
We believe these actions should help if the market continues lower, but investors should remember that no market goes straight up or straight down.
We don't know how long this wild ride will last, but for now we remain cautious.
The Fed is tightening, economic growth is slowing, and consumer confidence is falling to a 10 year low.7
This is not an environment to take excessive risk.
But there is good news for the economy.
First, we do not yet see warning signs of a recession.
Second, we believe we are witnessing peak inflation and peak COVID.
Finally, while the markets are often volatile in Mid-term election years, they can offer nimble investors an excellent buying opportunities around the election.8
We're watching markets closely and will be in touch if we need to make some changes.
P.S. How about some fascinating news as a distraction from markets? The James Webb Space Telescope has arrived in L2 orbit! You can check out real-time updates here if you'd like to geek out.
1 https://www.cnbc.com/2022/01/23/stock-market-futures-open-to-close-news.html
2 https://www.cbsnews.com/news/stock-market-down-federal-reserve-inflation-earnings-2022-01-25/
3 https://apnews.com/article/consumer-prices-inflation-c1bfd93ed1719cf0135420f4fd0270f9
4 https://fortune.com/2022/01/24/apple-microsoft-tesla-earnings-reports-tech-stocks/
8 https://www.marketwatch.com/story/heres-how-stocks-perform-around-midterms-in-one-chart-2018-09-11
