The S&P 500 has recently slid into a bear market due to inflation and fears of a recession. As expected, the Fed announced a 0.75% interest rate hike.1 That may not sound like much, but it’s the largest single rate increase since 1994. 1 To keep you up to date on what’s going on, let’s do a quick Q&A.
Q: What, exactly, did the Federal Reserve do?
A: Raise the “Federal Funds Rate”. This is the interest rate that banks pay each other for overnight loans. When the rate goes up, it costs more for banks to loan each other money. In response, banks raise their own interest rates. That’s why, when the Federal Reserve raises the federal funds rate, it eventually affects consumers and small businesses whenever they apply for a loan. Specifically, the Fed raised the rate up 0.75% to approximately 1.6%.1
Q: How did the markets react?
A: Initially, the markets rose soon after the announcement, as it was expected, and because many experts believe it’s necessary to tamp down on inflation.
The day after, though, the markets continued their slide. The S&P 500 and NASDAQ are firmly in bear market territory, and the Dow is getting close.
The reason for this is because the Fed also announced that a second 0.75% rate increase is possible in July. While higher interest rates are a proven tool for fighting inflation, each rate hike increases the odds of a recession, even if it’s a small one. The markets dropping further is essentially investors pricing in the likelihood of more action from the Fed…and a greater chance of an economic downturn.
Q: What is the Fed hoping to achieve here?
A: When the Fed announced the rate hike on Wednesday, they also revealed something else: Their economic outlook for the rest of 2022. The Fed’s hope is to achieve what’s called a “soft landing.” This is where economic growth slows, but a full-blown recession is avoided. There’s some justification for this hope. After all, if you remove inflation from the equation, the economy is actually in pretty good shape. The unemployment rate is at 3.6%, which is almost back to where we were in January 2020 before COVID hit.2 And consumer spending – the bedrock of our economy – remains strong. It was to shore up the economy that the Fed dropped interest rates in the first place. Now, the thinking goes, that mission is complete, which means it’s time for the Fed to pivot to the second prong of their “dual mandate”: stabilizing prices. (The first prong is stable employment.)
Unfortunately, soft landings are historically difficult to achieve, and the most recent data suggests an economic slowdown may already be happening. Consumer sentiment is dropping, retail sales numbers have dropped slightly over the last month, and while the economy continues to add jobs, it did so at a slower pace in May.1 Even the Fed admits that the unemployment rate will likely go up over the next few years. (Moving from 3.6% to 4.1%, according to their projections.1)
Q: So, what should we do moving forward?
A: The main thing right now is to remember that the markets move based on what investors expect to happen, not what is happening right now. At any point, those expectations could change. Every new bit of economic data between now and the Fed’s next meeting in July will be carefully scrutinized. That’s why it’s never a good idea to overreact to the day-to-day swings in the market, even if they seem significant. The sentiment that drives the market today may be completely different tomorrow.
Remember: We endured both a bear market and a recession not very long ago. Keeping the long-term in view helped us not only get through rough times but take advantage of a tremendous recovery.
Of course, if you have any immediate financial goals, or need access to some of your money in the short-term, let us know and our team will help you promptly. And of course, if you have any questions or concerns about your portfolio, don’t hesitate to reach out. That’s what we’re here for!
As the summer progresses, we’ll keep you apprised about what’s going on in the markets. In the meantime, enjoy the warmer weather knowing that we are here to do everything we can to keep you working toward your financial goals.
Prior to retirement your employer (or their payment service) handles all the details. They ensure you get money into your retirement plan and your bank account.
But who watches over all that after you retire?
You worked hard and saved for years for this moment. When you get there, you want to focus on following your dreams. You don’t want to be worried about money.
Will you still have someone making sure you get money into your bank account at the right time? What about making sure you are paying only the absolutely necessary taxes, and not a penny more?
That’s where our team comes in.
We specialize in helping remove the uncertainty of your “paycheck” in retirement. It should not be on your list of worries.
If you are concerned about paying too much in taxes, getting enough money into your account when you need it, accomplishing your charitable goals, or just making your money last, please give our team a call.
Our goal is to help you make some of those retirement dreams, reality.
We often think of retirement as the time to finally do the things we have been putting off. We tell ourselves “Work hard now so we can play later.” Or, perhaps, we get so caught up in the day-to-day chaos that finding time for leisure like hobbies, clubs, or social groups takes a back seat.
In fact, we are willing to bet that if you really think about it, your social circle can be traced back to two main groups:
work (obviously, we spend most of our time there)
and if you have kids, their direct network, whether that is school, sports, or extracurricular activities.
And those bonds are the ones that resonate most with you. They are the core aspects of your life: work, values, and children.
But what happens when you leave that job, and your kids get older? What happens when you suddenly have free time?
What are you left with?
A decades old list of potential hobbies?
What do you do with that?
Well, it’s a great place to start.
At the risk of getting too psychological, it’s easy to put the needs of a job or children before your own, and soon that becomes our identities.
But there is something really fun and exciting in getting to rediscover yourself! It’s like a clean slate.
So, pull out that list. Test the waters. See what piques your interest.
Don’t have a list?
Here are some ideas to get you started, as well as some ways to meet others who share that common interest.
This is not one of those penny stock ads or any “Get Rich Quick” schemes.
These keys will, however, help you stay disciplined and progressing towards your goals. So, without further ado, here they are:
✈️ Set a destination in mind. Meaning, what is the point of your investments? By when will you need your investments to pay for what you need?
📈 Decide on the acceptable level of risk for your journey to your destination. Investments have the potential to lose value. Those investments that sound amazing because they went up 100%, also tend to have the potential to go down 50% or more. Really, this question of risk comes down to, what level of volatility is needed for your plan to be successful? Remember, volatility is just a measurement of speed at which the price moves. That movement includes rising prices.
📜 Follow rules to your buying and selling of securities, not headlines. In other words, remove the emotions from your investment decisions. It is a lot easier said than done, which is why having a good advisor is tremendously helpful. Make sure your advisor has a rules-based approach to their investments.
💼 Always do your research. Don’t rely on “that guy at work” for your investment advice. Don’t rely on that one headline either. We have found that by doing your own research, you automatically remove a lot of emotion from the buy or sell decision.
There you have it. Four keys to investing in the markets. Of course, this is not an exhaustive list, but these are ones we find are missed by average investors. If you don’t feel you have all four in place with your plan, please give us a call.
You may want to get comfortable. This is a long one but a good one.
Rip Van Winkle woke up from a two-year nap and cornered you on the street. “What’s been happening?” he asks. “What did I miss?”
After catching him up on the last two years – COVID, the presidential election, Russia invading Ukraine, Will Smith slapping Chris Rock at the Oscars, etc. – he asks you: “By the way, how are the markets doing?” (Rip Van Winkle’s an investor, too, after all.)
Taking a deep breath, you say, “Well, the Dow dropped over 1000 points on Thursday, May 5.” (Which, as you probably know, it did.1)
Rip stares at you in surprise. “How?” he asks. “Why?”
Do you know what you would tell him? Do you know what your answer would be?
Well, here’s how we would explain what’s going on in the markets right now. We would say there are four things that he – and all investors – need to know. Let’s go through them one by one.
Inflation is the highest it’s been in decades
Between March 2021 and March 2022, inflation in the United States rose 8.5%.2 That’s the fastest 12-month pace since 1981.
One of the root causes of this rampant surge in prices remains the pandemic. Thanks to COVID, it became more expensive both to produce and ship a variety of goods – everything from computer chips to furniture. Before these supply chain problems resolved, though, the lockdowns and social distancing measures used earlier in the pandemic began to loosen. That caused consumers – buoyed by increased wages and lower borrowing costs, which we’ll get to in a moment – to spend more and more on goods and services. The simultaneous occurrence of skyrocketing demand and short supply drove prices up almost across the board.
COVID has also affected inflation in other ways. For example, wages have gone up in multiple industries due to a shortage in workers. That shortage has given many workers more say as to where, when, and how they work. To compensate for the increased expense of paying their workers, many companies have raised prices on the goods and services they provide.
The pandemic has also indirectly driven up home and rental costs. When COVID broke out, the Federal Reserve made it practically free to borrow money by lowering interest rates to near zero. This was to encourage people and businesses to spend money rather than save it, thereby buoying the economy. This indisputably worked, but it brought several side effects. One such was that making it easier to buy a home led to a rise in demand for homes. This escalating demand, naturally, led to higher and higher property values. (The U.S. housing market grew by $6.9 trillion in 2021 alone.4) But we’ve come to a point where home prices rose so high that, for many people, buying a house just wasn’t feasible even with low interest rates. Instead, they looked to apartments. The result? Rental costs are now the highest they’ve been in two decades.
How Inflation Has Affected Prices (as of March 2022)3
Item
Price Increase
Meat/fish/eggs
13.7%
Fruits/vegetables
7%
Electricity
11.1%
Furniture
15.8%
Used cars
35.3%
Other developments haven’t helped inflation. The war in Ukraine, and the sanctions placed on Russia, have driven prices up further on commodities like oil, gas, precious metals, wheat, and corn. New lockdowns in China, thanks to another wave of COVID cases, has snarled supply chains even further.
“Okay,” Rip Van Winkle says, “inflation is bad. What are people doing about it?”
To tamp down on inflation, the Federal Reserve announced its biggest interest rate increase in 22 years
On May 4, the Federal Reserve announced it would lift interest rates – more specifically, the federal funds rate – by a half-percentage point.5 That may not sound like much, but it’s the biggest single rate increase since 2000.
Essentially, what the Fed is trying to do here is cool down inflation. As we mentioned, low interest rates prompted people to keep borrowing and spending even during the worst of the pandemic. With higher interest rates, the idea is to reward saving over spending. If Americans spend less and demand goes down, companies then have little choice but to lower their prices if they’re to attract new business.
Lower prices, of course, means lower inflation.
History shows that raising interest rates is an effective way to tamp down on inflation. For example, from roughly 1965 through 1982, inflation soared to almost unimaginable levels, peaking at 13.5% in 1980.6 (That’s almost double what we’re at today.) To combat this, then-Fed chairman Paul Volcker initiated a policy of dramatically higher interest rates. At one point, the federal funds rate rose over 19%!7 The policy did its job, with inflation falling back to more “normal” levels by 1983.
Unfortunately, while using higher interest rates to cool inflation works, there’s a downside. It’s sort of like performing surgery with a blunt instrument instead of a sharp one. Why?
Because it often leads to a recession.
Now, before we go on (we would say to Rip), understand that we are not predicting a recession. Predictions, as you know, are a fool’s errand. Nor is it guaranteed that higher interest rates will cause a recession. But there’s also no use pretending that history doesn’t exist. And history has several examples of the Fed’s “fight inflation with interest rates” strategy leading to an economic contraction.
Whether you’re a gymnast or an airline pilot, landings are hard. But what economists call a “soft landing” is exactly what the Fed is hoping for. What is a soft landing? It’s when consumer spending and economic activity slows down enough to lower inflation, but not so much that the economy stops growing and businesses start laying off workers.
The problem is that there’s little margin of error to work with. For example, take Paul Volcker’s war against inflation in the early 1980s. It worked, but at the cost of a “double dip” recession from January-July 1980 and July 1981-November 1982. (At one point during the latter downturn, unemployment rose as high as 10.8%.8) More recently, the Great Recession can be seen as a kind of “hard landing,” in part due to the Fed’s attempt to cool the US housing market. But there were many reasons for the Great Recession that had little to do with interest rates.
On the other hand, the Fed has “stuck” the landing at least once, in 1994-95. Back then, the Fed doubled interest rates to 6%.9 While there were side effects, the country managed to avoid an economic recession.
Historians and economists debate whether other periods of tightened monetary policy led to hard or soft landings, so we’ll leave that discussion to them. All our drowsy friend Rip needs to know – besides how to use Zoom – is that the Fed is currently walking a tightrope, with high inflation on one side and high unemployment on the other. Time will tell whether the central bank can keep its balance. Much will depend on just how much the Fed raises interest rates, as well as how long global supply chain issues last. (Most economists expect rates to rise to around 3% by the end of the year.)
“So,” Rip Van Winkle says, between sips of much-needed coffee, “is that why the markets are going haywire? Because of a recession?”
Investors are trying to digest what this means for stocks – and for the economy.
As you know – but Rip needs to be reminded of, as he’s been asleep – the markets move less on what’s happening now and more on what they expect to happen in the future.
The volatility we’ve been seeing is proof of this.
The markets are trying to deal with a hard truth: The era of “free money” is over. Interest rates not only went to near zero due to the pandemic; they’ve been at historic lows for most of the last twelve years. Why is that important? Because super-low interest rates weaken government bond rates. That leaves investors searching for higher returns with little choice but to plow their money into stocks, which helped propel a historically long bull market that ended only when the pandemic hit. (But then resumed just a few months later.) So, higher rates are something the markets will simply have to adjust to.
It’s important that Rip understands this point about expectation, though. Expectation is why we don’t overreact to daily market swings, even extreme ones. Because at any point, expectations could change. Positive news out of Ukraine or China could do it. A strong jobs report could do it. Lower oil prices could do it. So, as long-term investors, what we’re really looking at right now is not short-term volatility, but long-term developments that will impact our long-term strategy.
Which leads me to the last point Rip should know (other than “murder hornets” being a thing now).
We knew this was coming – and we’re prepared for it!
To someone like Rip Van Winkle, waking up to a new world, this all might seem shocking, bewildering. After all, none of these storylines were around when he fell asleep in early 2020! But for us, none of these stories are new. None of it is unexpected. Which means none of it has taken us by surprise.
The rest of 2022 is going to be an interesting one. Headlines – economic, financial, political – will continue to raise eyebrows, stir debate, and even cause angst. But our long-term strategy accounts for both high inflation and higher interest rates.
So, the last thing you should know, is to go enjoy the upcoming summer. After all, you haven’t been asleep these last two years. Neither have we. Our eyes have been open the entire time.
And the last thing we should tell Rip Van Winkle? Get to work, friend.
You’ve got a lot of memes and videos to catch up on.
Not necessarily. These things happen pretty regularly, especially when headlines are negative.
In fact, you might recall that we kicked off 2022 with a big drop.2
So, let’s talk about what’s behind the latest wild market ride.
(Scroll to the end if you want to skip right to the reassurance.)
What led to the selloff?
Primarily, economic worries.1
Worries about new COVID-19 surges.
Worries about Ukraine.
Worries about the U.S. economy.
A report just came out showing the economy shrank by 1.4% in the first three months of 2022, surprising analysts who expected positive growth of 1.0%.3
Though a single quarter of negative growth isn’t a recession, it’s a sign that inflation, the Ukraine conflict, and the pandemic hangover are weighing on the economy.
Realistically, some form of a slowdown was probably inevitable, given the massive economic recovery of 2021.
And, the news isn’t all gloom. 1) This is a preliminary report, so we’ll see revisions later. 2) Economists still believe the economy has plenty of room to grow, particularly given the strength of the job market, so the economy could rebound. 3) Americans are continuing to spend.4
The economy is still strong, but it’s showing cracks. We’re watching closely.
You can see a theme: markets are being driven by worry and fear.
Is the selling done?
That’s impossible to say.
Could we see a bigger correction or bear market?
Absolutely. That’s very possible.
Corrections and pullbacks happen very frequently.
Here’s a chart that shows intra-year dips in the S&P 500 alongside annual performance. (You’ve probably seen this chart before.)
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%.5
We’re dealing with a lot of uncertainty in 2022 and investors are feeling very cautious about the future.
However, that doesn’t mean that we should hit the panic button and exit our strategies.
Knee-jerk reactions to market turbulence can be VERY costly.
Recently, we overheard two people talking about the NBA playoffs, which are currently underway. While praising their favorite team’s defensive performance, one of them said something that stuck with us:
“Defense wins championships.”
What a great line! Defense wins championships. The reason this stuck with us is because we’ve been thinking about defense while studying the markets recently. As you probably know, market volatility has been persistent since the middle of January. The S&P 500 has moved in and out of correction territory for the past two months, and the NASDAQ is technically in a bear market. (Quick reminder: A “correction” is defined as a drop of 10% or more from a recent peak, while a “bear market” is a drop of 20% or more.)
As you can imagine, this sustained volatility has a lot of investors concerned for the future. And make no mistake: it’s clear that we are living in turbulent times right now. Some analysts are warning of a potential bear market across the entire stock market; some economists, meanwhile, are even forecasting the possibility of a new recession.1 (Though it’s worth noting this prediction does not seem to be the prevailing one among most economists.)
No one enjoys investing during times like these. But as your financial advisors, we decided to write this letter to assure you that we have a major advantage: We don’t have to suffer from turbulent times. Because we have the ability to play defense with your portfolio.
And defense wins championships.
Let us explain what we mean by quickly recapping why the markets are so volatile. The various reasons are all interconnected, so we can untangle the knot of events fairly easily.
On Monday, April 25, health authorities in Beijing, China, rushed around the city to conduct as many COVID-19 tests as they possibly could. By the end of the day, they had tested almost 3.7 million people.2 Their goal? Identify and quarantine every infected person in the vicinity – so they could avoid the city-wide lockdown that nearby Shanghai has been dealing with for the past four weeks.
The reason this matters is because the world depends on China for a lot of things: Foodstuffs, rare earth metals, computer chips, cars, steel, plastics, etc. The worry is that if China goes on lockdown again, production on all these items will plummet. That would throw a major wrench into global supply chains, which are still – still – struggling to recover from the pandemic.
This is something the world can ill-afford at the moment, especially given the ongoing war in Ukraine. Much of the world depends on both these countries for the goods they need. Wheat and neon gas from Ukraine, for example. Oil and natural gas from Russia. Thanks to this conflict, and due to the sanctions imposed on Russia as a result of it, it’s now not only more expensive to buy certain items. It’s more important to ship them, too.
All these supply chain issues, of course, have contributed to the rampant inflation we’ve seen this year. For example, take something as simple as chicken eggs. Russia exports a huge percentage of the components that go into agricultural fertilizer. When it becomes more expensive for farmers to buy fertilizer, the price of corn goes up. When the price of corn goes up, the price of chicken feed goes up. When the price of chicken feed goes up, the price of raising chickens goes up. That leads to higher-priced eggs, which is further compounded by higher oil prices making it more expensive to ship those eggs to the market and…well, you get the point.
Understanding how the world’s issues, like COVID and war, contributes to supply chain problems makes it easier to see how they also contribute to inflation. And what does inflation have to do with the stock market? Simple: Inflation doesn’t just affect consumers. It affects companies, too. During periods of high inflation, it becomes more and more costly for companies to produce the products they sell. They can – and usually do – raise their own prices to compensate, but this can backfire if it leads consumers to go elsewhere. Either way, the company’s profit margin suffers – which means they return less value to shareholders. Shareholders, in response, then start selling their stock, driving the price down. These are the reasons we’ve seen such sustained volatility in the markets – and why that volatility will likely continue for some time.
These are indeed turbulent times we live in. But here’s the good news. If you look closely, nothing we’ve just explained to you is new, is it? We’ve been dealing with COVID since 2020; with inflation since 2021. In the last two years, we’ve lived through both a bear market and a recession and come out on the other side. We’ve been reading about supply chain issues for months; trade issues with China for years. The sources of today’s volatility are largely the same as yesterday’s.
Which means we know exactly how to deal with it.
As you know, when COVID first hit, we immediately moved to “play defense” with your portfolio. We accepted that growing wasn’t the objective anymore – it was preserving capital. Over the years, we’ve honed our tactics to be able to move to defense whenever the situation demands it. Our team will continue to monitor the situation, but we’re prepared for the possibility of a bear market. Would we rather always stay on offense, seeking to find new opportunities to grow? Of course. But sometimes, the best way to move forward is to keep yourself from moving backwards. Sometimes, avoiding market pain is the best possible gain. Due to our use of technical analysis, and the systematic rules we have in place that let us know when it’s time to buy and when it’s time to sell, defense will be our objective whenever conditions warrant it.
You’ll often hear folks like us say that investors or markets “hate uncertainty.”
And that causes market drops and volatility.
Why do we hate uncertainty so much?
Good news! We’re here with the antidote to fear and uncertainty. We’re going to talk about how we can look past our initial reactions and embrace the power of uncertainty.
Let’s start by answering a basic question: Why do markets, investors, and humans hate uncertainty so much?
Well, for one, humans are wired to prefer predictability and certainty.
And firms, traders, and other market players rely on forecasts and models.
When something big happens that throws the future in doubt (which happens pretty regularly), it makes their predictions and models inaccurate.
For long-term investors who measure success in years and decades, these blips can fade into the background noise.
For short-term traders who need to show success in days and months, it’s a pretty destabilizing experience.
That freaks people out. And often leads to drops, volatility, and other extreme market behaviors.
So, what can we do to find the silver lining hiding inside all the uncertainty in our world? Because it’s not going away.
One: View it as a reality check. Uncertainty is grounding. It shows us, sometimes painfully, that we don’t know as much as we think we do. So let’s embrace humility and accept how little we really know.
Two: Be grateful for what we have. What are you truly grateful for right now? Now’s a chance to appreciate and be thankful for what we CAN be certain of. No matter what’s going on in the world, we all have blessings in our lives.
Three: Embrace resilience. We all have an inner core of steel that’s only visible when something scratches the surface. Uncertainty challenges us to improvise, flex with the times, and build up our inner resources.
So, deep breath. Yes, times are uncertain, and yes they can be stressful, but we’re stronger than we think.
Was this helpful? Do you have any thoughts or concerns to share?
If you have a question about what we’ve discussed with you or you’d like to speak personally about what’s going on, please email us at yourteam@mmwealth.com.
What do you need to know about how markets performed last quarter (and what could happen this quarter)?
We broke down what you need to know about markets and the economy into a five-minute read. Click here to check it out.
Keeping up with markets and the economy is part of our job, and we want to share some key takeaways as well as what we’re watching for the months ahead.
First, a quick note: There’s not much new perspective on current events we can offer. Markets are still locked in a volatile pattern and will probably continue that way for the foreseeable future. We’re watching the data closely.
Today, we have a big-picture question for you if you’re interested.
While absorbing the recent news, we can be forgiven for thinking that the world is going off the rails.
There’s a global pandemic, worrying inflation, atrocities in Ukraine, and “unprecedented” developments everywhere.
A fear arises that it’s all getting worse, somehow.
If we feel that way, we’re not alone. A lot of people feel that way.1
So, let’s ask the big question: Is the world getting worse? Or is it actually getting better?
Honestly, we’re not sure that question can really be answered.
Why?
We imagine that you’ve heard the statistics of how far the world has come in terms of measurable progress (it’s pretty amazing).
But, though it might be nice to know that global poverty is down or that the rate of people killing people is historically low, that’s not really helpful when you’re getting gouged at the pump, your kid is home sick, and you’re seeing images of ruined lives on the news.
For the first time in human history, we can instantly communicate with folks thousands of miles away and see what they’re doing.
We have access to real-time news from everywhere in the world, and because of how the news is constructed, it’s nearly always the bad stuff that gets our attention.
Most of us spend hours each day consuming media of one kind or another.2
The question we ask each other has changed from “how are things in your neck of the woods” to “have you heard about {crisis of the moment}?”
We’re human. We live our lives one day at a time inside a fairly small bubble. And that bubble is easily influenced by daily hassles, media filters, and our own outlook on the world.
So, what do we do? How do we combat the existential dread and pessimism?
We think this is a serious and important question, by the way.
We need to know how to put things into perspective, for ourselves, for the children and young people who look to us for guidance, and for our loved ones who might need a boost.
A few ideas:
Invest time in relationships with the people we love.
Be selective in the news and media we consume.
Follow our faith if we have one.
Look for beautiful moments and treat them with awe (like that little girl at the fair in the photo above).
Make art, make music, and build something beautiful.
Volunteer, donate, and be the change we want to see.
What do you think? Any advice for keeping it positive?
We’ll close by asking you: How are you doing?
What’s going on in your neck of the woods?
P.S. Why is a practice of positivity so important? Well, it keeps us from making fear-based decisions, for one. We also think it helps us make our little corner of the world better. Johns Hopkins University thinks it might be a big deal for our health.3
