The broad market decline continued in the second quarter, with stocks retreating across the board. Large domestic stocks, as measured by the Standard & Poor’s 500, dropped 16.4%. The Russell 2000, a gauge of smaller domestic companies, declined 17.5% and the Nasdaq Composite, heavily weighted in technology names, dropped 22.4%. Foreign firms, generally speaking, were off with the Dow Jones World Index (ex US) down 14.7%.
Inflation is the primary investor concern, along with the Fed’s interest rate policies meant to fight it. The latest fed funds increase was 75 basis points, with another 75 telegraphed for the late July meeting. With the dual mandate of price stability and full employment, Fed Chairman Powell has made it clear that the committee is less concerned with avoiding a recession than it is with combatting the potential for runaway inflation. That shouldn’t come as a surprise to observers of market cycles and economic history. An overheated economy leads to inflation. To slow the economy, the only real arrow in the fed’s quiver is to tighten monetary policy (higher rates/borrowing costs). A slowing economy is a drag on corporate earnings, and lower earnings equal lower valuations. The goal continues to be a “soft landing”, but it is quite the challenge to effectively thread the needle. Corralling inflation while avoiding two consecutive quarters of contracting GDP may be asking too much. Time will tell.
So, what advice do we have for investors? It helps to remember the stock market experienced extraordinary gains for several years leading up to 2022. Markets have to take a breather from time to time, and the occasional downdraft, sometimes significant, should not be unexpected. The fact is, investors must be willing to subject themselves to market volatility in order to earn the higher long-term returns of equity investing. We in no way mean to minimize the emotional toll a painful decline in one’s portfolio can elicit, especially for those near or beyond retirement. But it helps to pull back and take a long-term view. Historically speaking, what these stock market declines can offer is opportunity. It’s an opportunity for the investor with cash earmarked for equity investment to buy companies at much more reasonable valuations. And for the investor with a portfolio that is no longer in balance with one’s carefully crafted long-term Target Asset Allocation, this is an opportunity for rebalancing, thereby ensuring one’s portfolio maintains the expected return and volatility characteristics appropriate for that specific investor.
In this challenging market environment, we recommend staying in close contact with your trusted fiduciary advisor. As such, we welcome your calls, texts, emails, etc. And, as always, we adhere to our discipline of strategic asset allocation and style diversification; a strategy designed to mitigate overall portfolio volatility and enhance long-term returns.