This is the hard part of a down market. Looking at the values of investment accounts that have lost money over the past year brings up a deep, instinctual feeling that something is wrong, and action is needed for survival. Most people can shrug off a downturn in the stock market that lasts 2 to 3 months. The real pain comes when we have had a recovering market for two months (early June to early August), only for it to reverse, like it never happened.
A recent article looked back at the eight times in modern history (last 70 years) where the S&P 500 was down 25%. If you had hypothetically purchased stocks one month after the -25% mark, your one year rate of return after purchase was positive 7 out of 8 times. Furthermore, the three, five and ten year returns were positive 100% of the time.
It is tough right now, but using history and data as a guide, there is reason for optimism. Sure, this time could be different, but the tougher markets of the past had different factors from each other, and the results are clear. Stay the course.
Inflation and the Fed
Markets don't go down double digits without good reason. These reasons stem from actions taken nearly two years ago that slowly moved through the economy with unpredictable effects. Supply chain disruptions in 2020 caused higher prices, and stimulus checks added fuel to that fire. The stimulus, among other fiscal and monetary policies, arguably saved the economy from meltdown two years ago. Now the Fed is making it their life’s purpose to stamp out inflation by raising interest rates. They have been repeating their stern messaging to the markets like a persistent mother standing her ground against a toddler in full meltdown mode.
The good news is that inflation in some areas of the economy is cooling. Home prices, ocean freight costs, lumber, rent, energy, and some food prices are (slightly) declining. Other areas like services (think tradesmen, accountants, etc.) are still going strong. This could mean the Fed’s actions are slowly starting to work. A common worry in the financial world is that the Fed is using lagging indicators like unemployment and inflation to guide their decisions on raising rates. This is equivalent to driving down the highway while only looking out the rear view mirror for clues on where to turn. A likely outcome of this would be their policy going too far, and unnecessarily hurting the economy in the process. The Fed meets next in early November, and the whole financial world will be tuned in, including us. If you have any questions, please don't hesitate to give us a call!
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