The investment world is off to a rough start in 2022. Since the beginning of the year, most of the major stock market indexes are now in correction territory. The S&P 500 is down nearly 14%. The more technology-heavy NASDAQ composite continues to flirt with "bear market" status. It is down more than 18%.
The cause of the early swoon centers around a few key issues.
- Higher inflation – Like many of you, we notice the higher prices we pay for our gasoline and our groceries. Inflation is a constant force in our economy, but prior to the pandemic, the rate of price increases was more subdued. The cost of living jumped significantly over the past several months.
- Higher Interest Rates – One of the primary tools used to slow inflation is higher interest rates. In January, the Federal Reserve announced plans to begin increasing the Federal Funds Rate. Most expect the first increase to happen in March. How much and how quickly the fed increases rates continues to be a concern.
- Russia and Ukraine – We woke up on Thursday to learn Russia advanced on their neighbor. This action sparked additional downward pressure in the global investment world. Russia produces a significant amount of the world’s oil, and the fallout from this event could cause further pain at the gas pump. But, it mostly adds another layer of uncertainty.
The recent declines do not compare to what we experienced just two years ago. The pandemic selloff was both faster and more extreme.
The news media focuses their attention on the bad things. This means we rarely see the silver lining. Here are some key things to remember.
- The worst of the Covid Pandemic appears to be behind us – We see many states taking action to reduce or eliminate the restrictions. This bodes well for economic activity as Americans get back to “normal”
- Earnings news has been mostly positive – Over long periods of time stock prices tend to follow profits.
- Valuations are improving – The combination of good earnings news along with the current correction means the stock market is more reasonably priced. In some ways, corrections like this one are healthy.
- The US economy is strong – The Federal Reserve would not consider increasing interest rates if there was economic weakness.
We know the recent turbulence makes it difficult to focus on your long-term plans. Nobody likes to see their account values drop. Uncertainty only makes those feelings worse. We are here to help guide you through times like these. Please do not hesitate to call us to discuss your concerns.