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Stock Market's Recent Slide - June Market Update

June 06, 2022
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Should you have any questions regarding these notes, please do not hesitate to contact Kevin at (678) 401-6102

At-A-Glance

7 min read

  • The stock market continued its recent slide through the first several weeks of May, ultimately dropping more than 20% on an intra-day basis, before rebounding somewhat recently.

  • Headline risk continues to drive day-to-day moves in the market, and we expect volatility to stay elevated in the face of both inflation pressures and the geopolitical backdrop.

  • As the Federal Reserve Bank cannot control the supply chain, it is focusing on the demand side of the economy by both raising rates aggressively and using “Fed Speak” to influence consumer behavior.

  • During times like this, it is important to stay focused on your financial planning goals and their longer-term time horizon. This is akin to focusing on the horizon while navigating stormy waters.

  • Remember that your advisor is here to help you stay the course. Please reach out if you have questions about your unique situation.

  

The Investment Committee met on the afternoon of June 6th. All members were present and had the opportunity to share their insights and investment research with the team. We were happy to see how well our portfolios had performed given the significant volatility in both the stock and bond markets this year.

As the media trumpeted the onset of a bear market, all major stock market indexes in the United States were down more than 20% from their peaks by late May of this year. We expect volatility to remain elevated due to rising inflation pressures, higher oil and gas prices, geopolitical unrest in Europe, as well as ongoing supply chain issues, which have recently been exacerbated by the additional Covid shutdowns in Shanghai, China. We remind you that the media will ring the warning bells at each of these events because it sells newspapers and brings in viewers. However, we want to encourage you to stay the course with your long-term plans. Panic and emotional responses over short term events have historically proven to not be an effective strategy to build and maintain wealth.

We are experiencing a new phenomenon this year as the bond market is down nearly 10%. Over the last 30 years, the markets have become somewhat accustomed to the Federal Reserve Bank cutting interest rates and providing liquidity to the markets during times of economic volatility, dislocation and downturn. We have seen this play out during scenarios such as the dot.com bubble, 9/11, the subprime mortgage crisis and the failure of AIG/Lehman Brothers and most recently during the initial Covid shutdowns in March 2020.

However, with inflation persistent and rising, the Fed is planning to aggressively raise interest rates. At the same time, they are planning to reduce their balance sheet which could reduce bond prices and increase bond interest rates. We will watch this process closely, as the Fed tried to do something similar in 2018, only to reverse course as market volatility increased. The Fed has stated their intention to follow through this time because of the damage inflation is doing to the economy.

They will also use “Fed Speak” to influence consumer behavior. It is important to remember that the Fed cannot influence the supply side of the economy. They cannot lower oil and gas prices or create more microchips. Therefore, they are focused on slowing the demand side of the economy. They believe their words and actions will slow the housing market. As you can see in the chart below, the combination of rising home prices and rising mortgage rates has significantly increased mortgage payments and housing affordability over the last year.

  

They have their work cut out for them as oil and gas prices continue to rise. This is while economic activity has been restrained in China due to the recent Covid lockdowns. Once these lockdowns are lifted, there will be additional pressures and demand for oil and gas which could further increase prices. We will be watching closely.

  

The Fed is also concerned about rising wages. As you can see below, there are nearly two jobs available for every person looking for work. This is continuing to put workers, rather than employers, in the driver seat demanding higher compensation and benefits. Both the current Fed Chair, Jay Powell, and former Fed Chair, Ben Bernanke, have stated that they would like to lower the number of job openings to bring this ratio closer to one to one. In my 34 years of doing this, I have never heard the Fed state that they would like to reduce housing prices, stock prices and reduce the number of jobs in the economy. We are truly living in unique and unprecedented times.

Final Takeaway

It is important to remember that your financial plan should be your NorthStar. It should guide your actions, or lack thereof, during times of volatility such as this. Staying focused on your long-term financial goals is similar to looking at the horizon while navigating the stormy waters and waves around you. We want to remind you that if this were easy, most people would be rich. Most people are NOT. Therefore, we want to help you pursue alternate thoughts and actions to what the masses typically do.

We look forward to talking with you soon. Thank you again for your continued trust and confidence in our team.

Should you have any questions regarding these notes, please do not hesitate to contact Kevin at (678) 401-6102

 

Members of the Investment Committee

  • Jesse Hurst, Financial Advisor - Chair, Impel Wealth Management

  • Kevin Myers, Financial Advisor - 30A Wealth Management

  • Clint Gautreau, Financial AdvisorHorizon Financial Group

  • Nathan Ollish, Financial Advisor - Impel Wealth Management

  • Joy Schlie, Financial AdvisorFHT Financial Advisors

The views stated in this piece are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.

Past performance does not guarantee future results. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards.Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.