The only thing crazier than the Bills and Chiefs playoff football game last weekend was the way markets traded on Monday and Tuesday this week. First, they cratered to open the day on Monday with the Dow down 1000 points, placing it firmly in the crosshairs of a correction. But towards the end of the day on Monday, it mounted a stunning comeback. The first thought after the crazy day is that the market is showing signs of resilience and we’ll get back on track after a rough start to the year. Wrong. The pattern continued on Tuesday with the Dow dropping 800 points to start the day and then doing the same reversal as Monday to finish the day even.
While the swings are nerve wracking, they happen pretty regularly when you combine investors getting jittery with computer algorithms automating a lot of trades.
What Led to the Giant Selloff?
There are a few things that have led to the volatility we’re currently experiencing.
Fears around the Federal Reserve raising interest rates, and what rapidly removing support could do to markets and the economy. With all of the craziness going on, many forget that we’ve been in a big financial experiment as the Fed pumps money into the economy. No one knows exactly how the economy will react when interest rates increase.
Part of the reason the Fed is raising rates earlier than they had initially communicated is inflation worries. Inflation is at a 40-year high, and it has the power to wreak havoc on the economy and all individual’s personal finances.
Tech earnings. Last week started the release of 4th quarter (2021) corporate earnings. Corporate earnings are really important – they actually used to be the main driver of the markets, now overshadowed by Monetary policy. So far, the earnings have been mixed, especially in the technology and financial sectors, where we’re seeing the impact of COVID-19 and supply chain issues come to fruition.
A potential hot war in Ukraine. Geo-political events usually have the least impact of any of the issues we’ve covered, but they seem to be the most concerning to investors. It’s easy to visualize the next world war as a Russian-Ukraine war that spreads to other parts of the world.
Bottom line: Markets are being driven by fear, anxiety and uncertainty.
Could We See a Bear Market or Serious Corrections in the Weeks Ahead?
It’s possible. 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. The red circles illustrate the market drops.
The big takeaway? In 14 of the last 22 years, markets have dropped at least 10%. We’re dealing with a lot of uncertainty and investors are feeling understandably cautious. However, that doesn’t mean that we should panic and rush for the exits.
We have no idea how long this wild ride will last.
The focus is always on the negative, but there are plenty of bright spots on the horizon, in terms of employment, earnings, economic growth and COVID-19.