Volatility is the price of admission

2022 is off to a rough start. The S&P 500 is nearing correction territory. Technology and high growth stocks have taken a beating. The Nasdaq index has declined for three straight weeks entering the week of the 24th and is down roughly 15% year-to-date.

For those that are unfamiliar, when markets decline 10% from peak to trough, that is classified as a correction. If that rises to 20%, that’s considered a bear market. To be clear, I do not believe we are headed toward the latter.

The thing that has everyone alarmed is how quickly this correction occurred. According to LPL Research, it only took 15 trading days from the start of the year for the S&P 500 to decline 10%.

What’s important to remember is that corrections are completely normal, and frankly, should be expected. Let’s take a look at the last 70 years:

On average, you should expect a 10% pullback at least once per year. And I hate to be the bearer of bad news, but its also possible to experience multiple corrections in one year, just look at 2008.

Volatility is the price of admission when it comes to investing. Markets can be extremely fragile in the short-run and incredibly resilient in the long-run.

We were spoiled in 2021, when the largest decline in the markets was around 5%. We have to remind ourselves that these pullbacks are normal.

Whenever there is a widespread selloff, it’s tempting to imagine the worst. Is this finally the bubble bursting that the bears constantly talk about? Is the ‘Rich Dad Poor Dad’ guy finally right? Should I have cashed out into silver and gold and buried myself in a bunker? Will this ever end?

You can find out a lot about yourself in the midst of a market downturn. Your emotions come into play when your investments are declining significantly.

But it all comes back to one thing: did you have a plan with your investments, and do you have the ability to stick to that plan?

If it is long-term wealth building, or preparing for retirement, then these short-term moves shouldn’t bother you. In fact, even if you hate hearing it, these pullbacks can present incredible buying opportunities. While the phrase ‘BUY THE DIP’ has been a bit overused, be patient and look for opportunities.

If one thing is clear this year, it’s that we are dealing with adjustments.

During 2020, as a result of the pandemic, the Fed slashed interest rates to essentially zero to create cheap money and encourage spending. The goal was simple: keep the economy out of a recession.

But now as the economy continues to recover, we are now facing intense inflation and continued supply chain disruptions. Not to mention, we have the mid-term elections upcoming. Can’t wait to hear everyone’s political views on social media…

On Wednesday, the Fed alluded to their plan to start raising interest rates, possibly as soon as March. In turn, this makes it more expensive to borrow money. Also, it’s important to remember, raising interest rates impact a company’s valuation.

So, when it comes to these companies that don’t make any money, and have outrageous valuations, investors aren’t willing to take that risk in this environment. The end result? Massive declines in some of these speculative assets.

Friendly reminder its ok to invest in companies that post a profit…

So now what?

No one has a crystal ball to predict when the markets will ‘bottom’ and start to move to the upside again. Inflation prints will likely remain high through the middle of 2022 and supply chains are gradually improving.

Remember that corporate earnings are expected to grow around 5-8% this year, the US economy is expanding with expected GDP growth of around 3.5-5%, and there is a low risk of recession in the next 12-months. THAT’S GOOD NEWS!

BE PATIENT, analyze your portfolio and ask yourself if you are too concentrated in one area of the market. Concentration can make you look like a genius when your pick is going up but can be atrocious when they move in the other direction.

Diversify, take a deep breath, and take care of yourself. When the world seems to be falling apart, remind yourself how grateful we all are. Be happy and stay healthy.

If you have questions, don’t hesitate to reach out.

-        Kyle

Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual.