The Resiliency of Markets: The Truth Behind Market Volatility and How You Should Respond

Friday Aug 12th, 2022

The return of market turbulence, heightened volatility, and geopolitical uncertainty have dominated the investment landscape during the year 2022. Times like these are always a good reminder of what wise investors already know – it’s not a matter of IF market volatility will occur; it’s a matter of WHEN.

We understand that current events can be a bit overwhelming, but remember, we created your financial strategy based on your goals, time horizon, and risk tolerance, and we anticipated there would be unsettling events along the way. If you know that swings (for good or bad) are always on the horizon, you can brace yourself for impact and worry less about what happens from week to week and more about what happens over the long term.

Let’s look at a few recent events that impact the market:

The Fed. As expected, the Fed bumped up short-term rates again at its July meeting. But the markets breathed a sigh of relief in reaction. Investors believe the Fed is getting a handle on inflation, which may mean slower rate increases.

Inflation. It feels like inflation is trending lower – check out gasoline prices. But the Fed's key inflation indicator, the personal consumption expenditures index, remained stubbornly high in June. What is the result? We're still getting mixed signals.

GDP. The U.S. economy shrank at an annualized rate of 0.9% in the second quarter as consumers pulled back on spending and businesses worked to reduce inventories. The latest GDP report showed a second straight quarterly contraction. Two quarters of negative growth would have been a recession by definition not long ago. Economists now look at more factors, such as jobs and hiring, before determining if a recession has started. Unlike similar times in history, hiring has been strong all year, with the unemployment rate near historic lows.¹

The economic slowdown was attributable primarily to decreases in inventories, a deceleration in the housing market, and lower government spending. Consumer spending increased a tepid one percent, well below the inflation rate during the same period.²

inverted yield curve

Company reports. They have been fantastic, with many companies checking in with better-than-expected results. In its July 29 update, FactSet reported that 73% of S&P 500 companies were surprised with earnings, and 66% were astonished by sales. ³

It is always encouraging to see when businesses encounter success. While macroeconomic trends are still a steady headwind, corporate America seems to be sailing straight and true.

The Bottom Line?

Despite all that has gone on in the world over the past few years, markets continue to remain resilient. Overreacting to short-term market movement by panicking in the face of volatility is one of the biggest mistakes that investors often make.

Investing in a diversified portfolio consistent with your objectives and risk tolerance is designed to help you reach your longer-term goals while smoothing the ride along the way. This is the best defense against our expectations for elevated volatility ahead. Time and time again the market has rewarded investors with long-term, disciplined approaches – and we believe that 2022 will be no different.

1. CNBC, July 28, 2022
2. CNBC, July 28, 2022
3. FactSet, July 29, 2022

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