Remember when you were learning to drive, how new and scary it could be? The first time you merged onto the freeway; the first time you switched lanes during heavy rush hour traffic; the first time you parallel-parked on a busy street; the first time you drove in heavy rain or in the snow.
Eventually, though, each of these became easier and less stressful, to the point that they became second nature. After all, you’d seen it all before. You’d done it all before. You’d experienced it and lived to tell the tale. No matter what bumps in the road you encountered, you learned exactly what to do.
We were thinking about this while studying the markets recently. Market volatility has been persistent since the middle of January. The S&P 500 has moved in and out of correction territory for the past two months and the NASDAQ is technically in a bear market. (Quick reminder: A “correction” is defined as a drop of 10% or more from a recent peak, while a “bear market” is a drop of 20% or more.)
As you can imagine, this sustained volatility has a lot of investors gripping tight on the wheel – metaphorically, at least. And make no mistake: it’s clear that we are living in turbulent times. Some analysts are warning of a potential bear market across the entire stock market; some economists, meanwhile, are even forecasting the possibility of a new recession.1 (Though it’s worth noting that this prediction does not seem to be the prevailing one among most economists.)
No one enjoys investing during times like these, just as no one, we imagine, enjoys driving a big rig in a snowstorm. But as your financial advisors, we want to assure you that we have a major advantage: We are not rookie drivers nor are we practicing for our driver’s test. Our advantage is that we’ve seen this, lived through this, and even benefited from this, all in the very recent past!
Let us explain by quickly recapping why the markets are so volatile. The various reasons are all interconnected, so we can easily untangle the knot of events.
On Monday, April 25, health authorities in Beijing, China, rushed around the city to conduct as many COVID-19 tests as they possibly could. By the end of the day, they had tested almost 3.7 million people.2 Their goal was to identify and quarantine every infected person in the vicinity in an attempt to avoid a city-wide lockdown that nearby Shanghai has been dealing with for the past four weeks.
This is important because the world depends on China for a lot of things: Foodstuffs, rare earth metals, computer chips, cars, steel, plastics, etc. If China goes on lockdown again, production on all of these items could potentially plummet and throw a major wrench into global supply chains, which are still struggling to recover from the pandemic.
This is something the world cannot afford at the moment, especially given the ongoing war in Ukraine. Much of the world depends on both China and Ukraine for the goods they produce. Wheat and neon gas from Ukraine, for example. As a result of this conflict and the sanctions imposed on Russia because of it, it’s now not only more expensive to buy certain items, it’s more expensive to ship them, too. All of these supply chain issues have contributed to the rampant inflation we’ve seen this year.
Understanding how the world’s issues (like COVID and war) contribute to supply chain problems makes it easier to see how they also contribute to inflation. And what does inflation have to do with the stock market? Simple: Inflation doesn’t just affect consumers; it affects companies too. During periods of high inflation, it becomes more costly for companies to produce the products they sell. They can – and usually do – raise their own prices to compensate, but this can backfire if it leads consumers to go elsewhere to obtain those goods. Either way, a company’s profit margin suffers – which means they return less value to shareholders. In response, shareholders start selling their holdings, which drives the price of the stock down. These are the reasons we’ve seen such sustained volatility in the markets – and why that volatility will likely continue for some time.
These are turbulent times we live in. But here’s the good news: If you look closely, nothing we’ve explained to you is new. We’ve been dealing with COVID since 2020; with inflation since 2021. In the last two years, we’ve lived through both a bear market and a recession and come out on the other side. We’ve been reading about supply chain issues for months and trade issues with China for years. The sources of today’s volatility are largely the same as yesterday’s.
Which means we know exactly how to deal with it.
We know that patience and planning will not only help us avoid making major mistakes, they’ll also help position us for when the markets eventually rebound. We know that diversifying our holdings and sticking to our long-term strategy eliminates the need for relying on guesswork or shots in the dark. We know that doing all these things together will not only help us get through today, it will help us seize tomorrow, too. That’s why, despite the headlines and gloomy forecasts, we remain confident in our direction and excited about the future. We’ve navigated volatility before, and we’ll do it again, all with a steady hand on the wheel.
As always, thank you for your continued trust in our team. If you ever have any questions or concerns about the markets, don’t hesitate to let us know!
P.S. We rarely ask for referrals, but during these unsettling times you might have a friend, relative, or co-worker who is in need of level-headed counsel on investing. Please give us a call if you think we can help.
1 “A major recession is coming, Deutsche Bank warns,” CNN Business, https://www.cnn.com/2022/04/26/economy/inflation-recession-economy-deutsche-bank/index.html
2 “Beijing Orders Citywide Covid-19 Testing,” The Wall Street Journal, https://www.wsj.com/articles/beijing-braces-for-omicron-wave-with-hoarding-and-testing-11650866581