The stock market’s energy was so chaotic this week.
Stocks across the board are getting clobbered, the economy’s future prospects seem questionable, and the Fed’s insistence to hike rates feels a little out of touch, right?
It’s difficult to be an investor these days.
Take a breath and zoom out with us.
First of all, these swings are not normal. On Monday, the S&P 500 fell 4% in the first three hours of trading, then rebounded to finish positive on the day – something it hasn’t done since October 2008.
But before you panic, remember that stock market drops are normal. They can even happen in healthy markets backed by a strong economy. The S&P 500 has gone through a drop of 10% or more every two years on average since 1950, and many of these drops have happened outside of economic crises.
Often, stock selloffs are just small steps back on the way to higher prices — not signs of something more ominous on the horizon.
What’s going on with the Fed?
The Fed is about to embark on a little policy switch to interest rate hikes, and the market is all up in arms about it.
On Wednesday, the Fed not-so-subtly hinted that it’ll start hiking interest rates at its March meeting, noting that it’ll “soon be appropriate” to raise the Fed funds rate. Powell stressed that the Fed would be measured and gradual with hikes and policy changes. But in the market’s eyes, he’s also left the door open for more hikes if inflation stays high.
If you’re fearing rate hikes because of the unknown, you’re missing the broader picture. Rate hikes are an inherently good story for the economy. The Fed wouldn’t hike if it thought the economy and markets couldn’t handle it.
The stock market also has a decent track record in periods of rate hikes. The S&P 500 has risen an average of 10.5% annually during the last six rate hike cycles, and it’s only fallen in one of those cycles.
The Fed’s success with this batch of rate hikes may depend on how much they can ultimately control inflation without stifling growth. But for now, it seems like the Fed is aware of the risks and well-prepared to walk the tightrope.
And what about Russia and Ukraine? The world is crazy right now!
Russia-Ukraine tensions have also caught markets off guard in what seems like the worst timing possible for geopolitical problems. It’s been an especially tumultuous scene for the energy market, with Russia being the largest oil producer in the world. Oil prices are already up 17% this month — a bad sign for inflation — as the unrest threatens to cut supply further.
It’s an unnerving situation, but chances are it won’t make a blip on the global economy’s radar. History shows that markets tend to shrug off geopolitical events with minimal economic impact, so it may not be worth changing your investment strategy just for this.
Where do I hide?
I get it. The swings are uncomfortable, and you want to keep your investments safe. For some of you, maybe it’s time to think outside of the box.
If you need your money in the next few years, you may want to take a look at conservative assets, such as bonds and cash. Nobody has a clue what happens next, and this could be the beginning of something bigger. The return may not be worth the risk. Crypto seems to be in the same high-risk bucket as stocks these days, so it may be tough to use it as a hedge against inflation or Fed mistakes.
OK, enough of the bad news. Tell me something good.
Well, there’s a seller and a buyer in every situation. That’s what makes a market.
If you’re a long-term investor — think several years or more — this may be your time to shine. Drops could be a good time to pick up some stocks on sale, and there may be some attractive stocks out there at discount prices. You may just have to be patient. Sometimes, the best stories take years to play out.
Plus, the Fed’s pivot to rate hikes could mean more opportunity. Cheap cyclical stocks, like financials, energy, and industrials, could thrive in a high-growth, high-rate environment.
Small-cap stocks could also be an interesting space. In fact, they’ve outperformed the S&P 500 in two out of the past three rate hike cycles. Why? The Fed hikes rates when it thinks the economic outlook is bright. And when the U.S. economy is growing, companies with more domestic-focused sales tend to reap the biggest benefits.
There’s always opportunity. You just have to look for it.
How long will this last?
We’re not sure. Our crystal ball broke a while ago.
While we can’t predict the future, there are signs that the market’s mood may be changing. Individual investors have started nibbling at the dip. International stocks have held up fairly well. And if the Fed can help steer the economy and avoid a recession, history shows this drop may not last long at all. Since 1990, the S&P 500 has never taken more than seven months to recover its losses when it’s fallen 10% or more outside of a recession.
The arc of your investing journey may be long (and difficult at times). But the more you zoom out, the more you’ll see how resilient the market can be in the face of change.