From the Desk of Dale Crossley and Evan Shear
Keeping Emotions in Check Despite the Current Market Volatility
“If you cannot control your emotions, you cannot control your money.” Warren Buffet
The annual inflation rate hit 9.1% in June, the highest it has been in more than 40 years. The market is continuing to experience high volatility and uncertainty, as it has since the beginning of 2022. Unfortunately, not much has changed. We understand – letting your emotions not get the best of you is easier said than done, especially since the markets seem to fluctuate almost hourly. It’s not the first time in history we’ve had volatility, and it certainly won’t be the last.
What History Has to Say About the Current Market Volatility & Uncertainty
BlackRock, the world's largest asset manager, recently downgraded its stock market outlook in response to the ongoing market volatility and uncertainty. As a result, the firm is currently reducing its stake in equities and re-allocating the money to investment-grade credit. However, the ongoing market volatility and uncertainty will not persist forever, and history can prove it. For example, the 1970s oil crisis caused a dip in the market's performance between 1973 and 1974, but it still recovered and grew. The 2008 banking and credit crisis also caused a significant dip in the market's performance, but it passed, too. Likewise, we believe the current decline is only temporary.
Fortunately, the Fed is taking measures to curb the current inflation by raising interest rates. The Fed's move to raise interest rates will affect inflation and investments in the following ways:
- Inflation – A higher interest rate reduces the availability and circulation of money, thus reducing spending and helping curb inflation.
- Investing – A higher interest rate also affects companies' cash flow and ability to raise capital, lowering their current and future performance outlook. This (coupled with the reduced money supply) makes many investors cautious about buying more stocks.
Interestingly, a change in interest rates impacts the stock market almost immediately. However, changing interest rates usually take longer (up to 12 months) to impact the economy.
Inflation's Impact on Earning & Spending
Unfortunately, inflation is also starting to erode spending and investors' earnings, and Wall Street is indicating that it may scale back its earnings forecasts. The forecast on S&P 500 companies' aggregate earnings has appreciated by 2% for 2022 and 2023.*
However, runaway inflation may likely erode this forecast, and there are credible concerns about a looming recession. Wall Street reduces its consensus call on aggregate EPS in the S&P 500 by about 15% in 12 months in a typical recession. Considering that the current expectation of aggregate profits is $239, a decline of 15% could bring the figure down to $206. The S&P 500 index may also drop from 3783 to 3200.
Geopolitical Tensions May Persist
Geopolitical tensions, not new of course, affect the economy's and the market's performance. For example, America's withdrawal from the Iran nuclear deal in 2019 caused a notable dip in the market's performance.
Unfortunately, the world is experiencing multiple geopolitical conflicts, and the BlackRock Geopolitical Risk Indicator suggests that they may persist. The most notable geopolitical conflicts include:
- The Russia-NATO conflict
- S.-China strategic competition
- Gulf tensions, most notably the stalled Iran nuclear deal
- North Korea's nuclear buildup
- European fragmentation
- Climate policy gridlock
- Terrorist attacks
- Major cyberattacks
Some of these geopolitical tensions pose a greater risk to the market than others. For example, the Russia-NATO conflict is more pressing than the ongoing European fragmentation. However, overall the market and investors are currently the most focused on inflation.
The Market Has Proven to be Resilient
Not much has changed since the beginning of the year. The ups and downs in the market, sometimes hourly, are still enough to cause angst. During this market downturn, the best defense is to make informed, not emotional decisions. Voyage, our proprietary investment process, especially helps during times like these. Investors who make long-term investments can remain confident — and upturns have always been stronger and more rewarding than pullbacks.
If you have any questions, please reach out. Especially during this time, that’s why we’re here.
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There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. All opinions are as of this date and are subject to change without notice. Past performance is not a guarantee of future results.