What Should You Do….?
After the market declines experienced so far this year, many people may be wondering what they should be doing. The meteoric rise of the markets since the drop experienced at the onset of the COVID pandemic has caused complacency amongst investors and belief the markets can only go one direction – up. The last few weeks have been a reminder the markets are indeed volatile and can go down at times. If you have not done so recently, it might be best to take time to clearly identify your personal financial goals and how you plan to achieve them. And then ask yourself a few questions, such as, if the stock market were to continue on a downward trajectory for a sustained period how would it affect your goals? Would you be able to maintain your income and lifestyle? Are the projections you have used in the past still valid or were you perhaps a little too optimistic in what the market could return? The primary objective for many of our clients is to create a sustainable, steady income throughout retirement. When this is achieved, market fluctuations, such as what we have experienced so far this year, do not cause concern nor do they impact long term spending.
There are other questions investors might be asking right now, including what is causing recent volatility? When will it end? What should investors expect going forward? Let’s take a look and review recent activity. The major economic event last week was the Federal Reserve meeting. There was no immediate action taken but it was conveyed their bond-buying program will wrap up over the next couple of months, as was previously expected. The Fed remains on track to raise interest rates at their next meeting in March. What has changed over the past few months, and most likely caused investor angst, is the acceleration of the bond buying program taper and projections for more interest rate increases in 2022 as the Fed feels pressure to act with inflation remaining at multi-decade highs and showing no signs of slowing.
On a positive note, Gross Domestic Product (GDP) growth for the fourth quarter came in at an annualized pace of 6.9%, well ahead of the 5.5% estimated. 2021 was the strongest full year for economic growth in the U.S. since 1984 as the recovery from the unprecedented drop in activity during the early days of the pandemic continued in earnest. The largest component of GDP, consumer spending, appears to have been strong during the quarter, which included the traditionally busy holiday season. Concern about a return to 1970’s style stagflation remains, but the latest GDP reading gives plenty of reason to think a broad slowdown in economic growth remains unlikely.
Not a Walk in the Park
Many descriptions or analogies are used when referring to the stock market, especially during volatile times. These analogies might include a ship sailing in troubled waters or a casino when speculation seems to be rampant. Most investors would be pretty content if the markets behaved like a leisurely stroll through a city park where there is continued, steady forward movement. The market does not always act in that manner and similarities are more often made using wild amusement park rides. With the ups and downs last week, the most fitting ride is probably a roller coaster. The markets began the week Monday with a major sell-off bringing the S&P 500 down almost 10% from the beginning of the year. Fortunately, the markets quickly recovered during the day and somehow managed to eke out a small gain. The total market fluctuation for the day between high and low was more than 4%!
The volatility continued leading up to and after the Federal Reserve meeting in the middle of the week. There were two days where the markets showed great promise and began the day much higher only to give up most of the gains by the end of the day. Finally, the markets were able to gain traction on Friday and staged a massive rally. The turnaround on Monday and strength on Friday lead us to believe the worst is behind us. But we also think if this is the beginning of a rebound, it may not be consistent across all sectors. We do not anticipate the more speculative growth stocks, which have been especially beaten down, to stage a quick comeback or even return to the same levels where they were trading prior to this market downturn since many do not have positive earnings or still have extended valuations. Those sectors which perform better during times of rising interest rates and slower growth will most likely continue to be the best performing. Fortunately, market pullbacks present buying opportunities. Even if the market is not finished with this downturn, we are closer to the bottom than the top.
Thinking of most roller coasters, the ride begins by being pulled up a large incline and upon reaching the top, slowly crests before beginning a rapid descent. It is at the top where riders experience the most nervousness and as the ride gets closer to the bottom riders’ anxieties subside. Investors generally view the markets with more fear toward the bottom and less worry at the top when, in fact, they should have the opposite view. The challenge is knowing when that bottom will occur and how close (or far) away the market is from that point at any given time. Despite all the volatility during the week, the stock market ended about the same way roller coaster rides do – at the same place they began. The S&P 500 did manage a very small gain, the first positive week of the year, with the Dow Jones Industrial Average showing a larger gain but the Nasdaq ended almost exactly where it began.
Much of the market movement of recent weeks has been attributed to uncertainty about possible Fed action, which has now been priced into the market so the focus will shift towards earning releases. Overall earnings this quarter have not shown levels of earnings growth as high as the previous few quarters but have remained solid so there remains optimism earnings reports will provide positive momentum to the markets, especially with some of the mega-tech names reporting earnings this coming week.
The resilience of the markets last week provides hope better days are ahead, but this is a reminder of how the markets can behave. It has been often said that as January goes, so will the remainder of the year. There will undoubtedly be continued ups and downs in the market but we still believe there will be positive returns for the year. If you are unsure what to do or if the recent market downturn has caused you worry this is a good time to re-visit your complete retirement plan, which not only includes investments but also tax and income planning with the last being the most important of all. Be sure you can confidently answer the questions posed at the beginning and if not, please give us a call to review your situation. Do not get caught up with short-term market movement but rather focus on the long term and do not lose sight of your goals and objectives.
Have a wonderful week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
Office phone # (952) 460-3260