Client note on volatility and inflation

 Client note on volatility and inflation

If you’ve felt like stock prices have been more volatile in 2022 than in recent years, you’re right on the money. Let’s take a look. Big picture The S&P 500 has posted 81 daily moves of at least 1% through August. Of those moves, 39 have been to the upside and 42 to the downside. In this chart, we’ve highlighted 2022 to show how it compares to other years since 2000. Since the daily report was compiled, stocks have seen a few more 1% swings. Why’s this happening? The Fed, largely. Its monetary policy of raising interest rates to slow inflation without triggering a recession has created a lot of uncertainty. With more than 70 trading days left in the year, it’s probably a safe bet to say we could see more. Price swings are unnerving, but as that chart above shows, they are nothing new. Digging deeper We’re entering a tricky time of year: the Fall has a reputation for bringing an extra measure of market volatility. Some of the stock market’s most challenging events have hit in September and October. Other seasonal trends can also play a part. Investopedia found that institutions start preparing for year-end distributions around

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Coronavirus infects financial markets

Recent news about the coronavirus outbreak is tragic, with unimaginable and unmeasurable implications for the many affected. As we attempt to discern incoming economic data, our goal is not to diminish the harsh realities faced by those affected, but to keep in mind that there are economic impacts on investors and to make sense of a market environment that reacts in real time to public health emergencies. What’s happening? Global equity markets sold off sharply today following reports over the weekend that coronavirus infections are spreading outside of China at an alarming rate. The global demand shock will be hard to quantify for some time as the scope of the social and economic impacts in affected countries remains fluid. Governments are trying to balance the need to provide the public with information against the risk of causing panic. We are observing confusion among governments and policymakers, which is spurring risk-off behavior among investors. Yesterday, U.S. Treasury Secretary Steven Mnuchin told reporters that policymakers would explore options to respond to coronavirus. We think elevated levels of two-way volatility will follow today’s initial reaction to the spreading of the virus. Therefore, we caution investors against reacting to these acute price moves. Bigger

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Coronavirus fears are not a reason to sell in this market

Last week, global markets added the word “coronavirus” to their collective vocabulary. And with that, the calm that had settled over financial markets in recent months was shattered. Emerging markets and Asian equities bore the brunt of the blast, while in the United States, concerns about the virus were evident on Wall Street on Friday, with the S&P 500 down about 1%, its worst drop since October. Markets were supposed to come back down to earth after a more than 30% rise in 2019, but the arrival of the coronavirus has added a layer of unforeseen complexity. Irrational fears can move markets sometimes violently, and that leaves investors wondering if it’s a good idea to simply hunker down and wait out the storm. So, should they? Yes, and here’s why. Based on past incidents like the SARS outbreak of 2003, the virus isn’t likely to be more than a one-time event. While specific industries will probably take a big near-term hit from these worries–think shares of airlines, casinos, and other companies with exposure to China–the coronavirus doesn’t seem to have the staying power to move markets for more than a short period. In the U.S., the S&P 500 was already

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Market volatility: Don’t just do something; stand there

We often talk about market volatility in the midst of surprise drops, but it’s useful to consider during calmer moments what behavior could be best for your accounts. When markets are in turmoil and account balances start to fall, many people feel a strong temptation to do something to “stop the bleeding” and cut their losses. But it’s often the case that staying the course proves to be the better path in the long run — and sometimes in the short-terms also. As we look back at the extreme market volatility that began at this time last year (Q4 2018), let’s consider how a few different investing scenarios would have played out. According to an analysis done by Vanguard, a hypothetical 60/40 stock/bond portfolio worth $1 million on November 1, 2018 would have lost 5.7% of its value by Christmas Eve. Yet selling the portfolio at that time and getting out of the market, even briefly, would have cost an investor tens of thousands of dollars in two months, compared to the alternative of staying fully invested. When faced with a similar situation, think about how you might feel if markets rebounded and you could have earned back all your

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What to make of last quarter’s market volatility

Recent market volatility is a reminder that there are risks to investing. Given that markets has risen over the past 10 years without a major pullback, a downturn is a normal and healthy part of market movements. Without corrections, markets can become overvalued and bubbles can form. Concerns about an economic recession, however, are still low; we continue to see strong fundamentals and a generally sound economy. Economic data remains strong, including consumer confidence, retail spending, and employment trends. And although the Fed has raised interest rates, they are still far below levels that might choke off economic growth. All of this begs the question: if everything is fine, why did markets drop so suddenly? Several fear factors have come together to spook investors, including trade with China, uncertainty in Washington, and the Federal Reserve’s interest rate policy. These factors may continue to cause fluctuations in the short term, but it’s important to keep in mind that these do not reflect the fundamentals of corporate America or the economy. Another factor likely contributing to rapid market decline is that much of the trading these days is done through hedge funds, ETFs, and automated trading. One manager noted that some 150

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Quiz: What’s your risk number?

Over the past two days, we watched markets drop as they haven’t done since February: the Dow is down 1,400 points, and the NASDAQ is near correction territory. If you’re feeling anxious about it, there’s a decent chance it can be traced to one of two things: missing context or misaligned risk appetite. CONTEXT Over the past two years, U.S. markets have soared. The Dow Jones Industrial Average gained more than 7,800 points in 2016 and 2017, and has continued rising this year. Because markets have been so high, the dramatic loss numbers we’ve seen in yesterday and today’s headlines may sound scarier than they are. A little context may help put them in perspective. Yes, the S&P 500 has been down for the last six trading days and the Dow dropped dramatically two days in a row, and these point-losses sound frightening. But remembering the elevated growth of the last two years can help us put it into context. Even after today’s losses, the Dow is right around where it was in July. Do you remember the last time the Dow dropped as much as it did in the last two days? It was in February, when the Dow

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Volatility strikes back

If you’re a little taken aback by the whipsaws in markets lately, you’re not alone. Though jarring, what we’re experiencing is a perfectly normal return to volatility following two years of unusually smooth sailing. The surprise was that markets ran ahead so far so fast without any appreciable pullback. Last year, we saw six of the seven lowest measures in volatility in history. Keeping your cool can be hard to do when the market goes on one of its more traditional roller-coaster rides. It’s useful to have strategies in place that prepare you both financially and psychologically to handle market volatility. Here are a few things to keep in mind: Have a game plan Having predetermined guidelines that recognize the potential for turbulent times can help prevent emotion from dictating your decisions. For example, you might take a core-and-satellite approach, combining the use of buy-and-hold principles for the bulk of your portfolio with tactical investing based on a shorter-term market outlook. You also can use diversification to try to offset the risks of certain holdings with those of others. Diversification may not ensure a profit or guarantee against a loss, but it can help you understand and balance your risk

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