This is a new installment in an ongoing series where Marc Bautis, Wealth Manager and Founder of Bautis Financial, comments on hot topics in the financial industry.
What’s Driving the Markets?
The S&P 500 entered into a bear market on Monday, which is described as a 20% drop from its highest point. The markets are currently driven by inflation and the potential response from the Fed in raising rates. The volatility in the market will slow down or stop once we start to see some peak inflation numbers and once the investor sentiment changes, to believing that the Fed has gained control. Right now, neither of those are occurring. On average, among the last 17 inflationary periods, the S&P 500 gained 13.2% in the 12 months following the inflation peak.
In May, there were some predictions from economists that we had reached peak inflation, meaning that inflation should slow down going forward. The market reacted positively in mid-May, only to see another bad inflation report come out last week that revealed we’re at 40-year highs. The market quickly dropped, which continued into this week.
The Fed is meeting today, and they were projected to announce a 50 basis point (0.5% point) increase in interest rates. However, after the inflation numbers delivered last week, talk is that the Fed will increase rates by 75 basis points (0.75%)
That might be frustrating after the volatility and uncertainty we’ve already experienced this year, but it’s part and parcel of the market environment right now.
I don’t know how the summer will play out, but I can offer some reassurance: we’re prepared for this and we’re watching closely. With so much talk about recession and inflation in the headlines, you may be (understandably) nervous. We may or may not see a recession, but Jeremy Siegel, a Wharton economics professor thinks that the S&P 500 is already pricing in a recession for 2023.
Recessions can feel like a financial whirlwind, and the best way to prepare is a solid financial strategy. One action you can take is to run a Monte Carlo simulation on your portfolio. Monte Carlo simulations show how a portfolio will perform in all different types of economic scenarios, including the ones we’re experiencing this year. We know that over a long period of time investments tend to go up, but it’s never in a straight line, and years like this do happen. Monte Carlo simulations can help provide peace of mind for investors concerned about the progress they’re making toward their financial goals. If investors are not on track, there are plenty of options of what to do to improve.
One of the hardest parts of a recession is the market panics, volatility and emotional highs and lows that can occur. When you hit one of these low points, I want you to keep these three things in mind:
- Avoid knee-jerk reactions. Watching the stock market and the value of your investments rollercoaster can test the patience of even the most disciplined investor. But avoiding emotional reactions is absolutely critical to protect your long-term goals.
- Revisit your risk tolerance and portfolio. If the recent volatility has you uneasy, reconsider how much risk you’re willing to accept in exchange for potential growth in your portfolio. If your risk appetite has decreased because your life’s priorities have changed, I can help you revisit your strategy. It’s critical to ensure that the risk you have in your portfolio is correlated with how much risk you should be taking and how much risk you are comfortable with.
- Reach out for advice and reassurance. It may be tempting to cash out and stay on the sidelines, but that almost always means ensuring losses – especially in today’s high-inflation environment. Instead, give me a call, and we’ll discuss current conditions and what it means for you.