We experienced additional market volatility this week, in anticipation of the Federal Bank’s announcement on interest rates. For several days the market declined +3%, followed by an end of day rally to bring markets back to even. The DOW (30 biggest companies in America) and S&P500 (500 largest companies in America) and Nasdaq (technology companies in America) are all down to start off the new year.
We expect ongoing market volatility while some of these issues are resolved. We see some issues being resolved quickly and some will take some time.
Our markets are responding to:
- Interest Rates: The federal bank has promised to raise interest rates 3 times this year. With higher interest rates, there is concern smaller companies will endure higher costs of borrowing money to fuel their growth. Our markets usually react negatively during early phases of interest rate increases. Usually, they eventually subside, and the market moves on.
- Ukraine: The potential conflict between Russia and Ukraine continues to build. America and some of its NATO allies have sent equipment and resources to the area to prevent President Putin from invading. We don’t believe President Putin wants a war with NATO and will stand down in the midterm.
- COVID: The Omicron variant is increasing its impact on American businesses as the number of sick employees continues to rise. The CDC believes the Omicron variant will be less impactful than previous variants and that we will be able to resume normal activities soon.
- Stimulus: The ongoing political tug of war on the stimulus continues as well. We don’t think the stimulus will be modified/approved this year. Again, the market has anticipated this economic boost, but ultimately will move forward without it.
The following chart shows the frequency of 10% market corrections (see the red dots), while the grey bars show market performance at the end of the year. In many years, a strong market showed significant weakness at some point in the year. This might be a year where we need to be patient investors.
Again, market volatility of this magnitude is normal, but it doesn’t feel very good. If you have questions or concerns, please call us anytime.
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We trust you found this review to be educational and informative.
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As always, we are honored and humbled you have given us the opportunity to serve as your financial advisors.
Eric & Kelly