The S&P 500 is down about -7.0% year to date through Friday’s close after briefly dipping below -10.0% from recent highs. The Nasdaq 100, a large cap, technology focused index, is off even more, falling about -11.4% in just four weeks to start the year. Bonds, as judged by the 10year US Treasury, have sold off as well, with yields rising from 1.51% to about 1.81% today.
The reason for this volatility primarily revolves around the high inflation we are experiencing and the tightening cycle the Federal Reserve is about to embark on. Clearly, a secondary concern for the markets relates to growing geopolitical concerns. Neither concern will be resolved in the near term. A higher benchmark interest rate is ultimately needed to combat inflation, but the Federal Reserve must thread the needle between staving off prolonged, high inflation and not choking off growth too soon. Last week, Fed Chair Jerome Powell signaled that a 0.25% interest rate liftoff should occur in March, however markets still seem to fear that the Fed is already too late to make their move.
Stock market corrections are different than bear markets. Corrections are generally sharper, steeper selloffs of 10-20% with quicker rebounds, while bear markets are typically accompanied by a weakening economy or recession and lead to larger drops of more than 20% for extended periods of time. This volatility feels more like a correction, with higher growth names being dramatically repriced for higher interest rates in the future. Fundamentally, the US economy remains strong. The labor market is very tight and last week’s GDP report was strong, showing the US Economy grew at an annual rate of 6.9% for the fourth quarter.
We often take the calm markets of recent years for granted. A year like last year – stocks up more than 20% with no more than a 5% pull back at any point in the year – is far from normal. We could say the same about 0% short term interest rates, 7% inflation and the ultra-accommodative fiscal and monetary policy we have seen these last two years. During times of stress, investors must keep their wits about them and remember that strategies put in place account for volatility like this. It is difficult in practice, but we know that patience in times of panic is often best.
As always, we strive to steward your wealth with the upmost delicacy, navigating these tough times for you, and are available should you have questions or concerns.
-Withum Wealth Management Investment Committee