By Schwab Center for Financial Research
U.S. and global stocks fell sharply Friday as heightened risk of an imminent Russian invasion of Ukraine spooked stock markets and sent oil prices sharply higher. The S&P 500 lost 1.9%, the Dow Jones Industrial Average fell by 1.4%, and the technology-heavy Nasdaq fell 2.8%.
Stock market volatility was high on Thursday, too, after a sharp 7.5% year-over-year rise in the Consumer Price Index stoked fears of weaker economic growth amid rising inflation and potentially more aggressive Federal Reserve monetary tightening.
St. Louis Federal Bank President James Bullard suggested on Friday that the Fed was considering an even more hawkish response than previously anticipated. In an interview, Bullard mentioned his support for raising the Fed’s benchmark federal funds rate by a full percentage point by the start of July. The 10-year Treasury yield fell to 1.94% from a high of 2.06%.
Meanwhile, concerns that a military conflict could affect global economies caused investors to seek the safety of U.S. Treasury securities, sending their prices higher and yields lower.
U.S. stocks: Inflation is an ongoing concern
Friday’s selloff emphasized how worried investors are about inflation. Higher prices are hurting consumer confidence. A tight labor market, rising wages, and higher energy prices also seem to be speeding up the Fed’s reaction — effectively pulling forward the timeline for tighter monetary policy.
Growth-oriented sectors were hit hard. Information Technology and Consumer Discretionary sectors led the weakness in the S&P 500, while the Energy and Utilities sectors gained.
Global stocks: Watching the Russia-Ukraine situation
The human costs of military action are unmeasurable, yet geopolitical events involving Russia since the fall of the Soviet Union have had little impact for globally diversified investors. On the day Russia invaded Ukraine in 2014, U.S., developed- and emerging-market stock indices around the world dipped less than 2%. They rebounded at least partially during the following five days.
The potential for disruptions to energy flows could slow Europe’s economy. However the rise in energy prices over the past year could already reflect some disruptions, and governments are capping prices for consumers to lessen the impact.
Bonds: Federal Reserve is likely to begin rate hikes in March
With inflation at its highest level in decades and a strong labor market, the Fed is likely to increase the federal funds rate four to five times this year.
Expect more volatility in the riskier parts of the bond market. Tighter monetary policy means aggressive income bond investments like high-yield bonds, bank loans, and preferred securities could see increased price fluctuations.
Interest rates for consumer loans, such as auto loans and business loans, may rise as the Fed hikes rates. Loans tied to short-term interest rates — like auto loans or credit cards — tend to be more sensitive to changes in the fed funds rate than mortgage rates, which are generally tied to long-term Treasury yields.
Trading takeaways: Volatility rose
Volatility spiked. After briefly trading above the 30 level, the Cboe Volatility Index (VIX) closed Friday at the highest level since January 27. At its current level around 28, the VIX is implying daily moves in the S&P 500 index of 77 points in either direction.
Equity traders should consider reducing average share size and dollar amounts per trade. Consider taking profits quicker than usual, because intraday ranges are generally wider and the risk of overnight up-or-down gaps is more pronounced.
What should long-term investors do now?
Market volatility is unsettling, but historically not unusual. If you’ve built an appropriately diversified portfolio that matches your time horizon and risk tolerance, it’s likely the recent market drop will be a mere blip in your long-term investing plan.
However, it can be hard to do nothing when markets are rough. Given what has been happening recently, consider a few of our investing principles:
1. Don’t try to time the markets
It’s nearly impossible. Time in the market is what matters. While staying the course and continuing to invest even when markets dip may be hard on your nerves, it can be healthier for your portfolio and can result in greater accumulated wealth over time.
2. Build a diversified portfolio based on your tolerance for risk
It’s important to know your comfort level with temporary losses. Sometimes a market drop serves as a wake-up call that you’re not as comfortable with losses as you thought you were, or that a portfolio you assumed was appropriately diversified in fact isn’t.
3. Build in protection against significant losses
Modest temporary losses are one thing, but recovery from significant losses can take years. Traditionally defensive asset classes, such as cash investments and short-term bonds, tend to perform better when stocks are down.
When used for diversification, they can help buffer a portfolio against the effects of up-and-down markets. You’ll also want to consider defensive assets for shorter-term goals or accounts from which you expect to draw money within the next few years.
4. Ignore the noise
It’s hard to shift your attention when headlines and TV news are focused on the market drop. However, markets historically have fluctuated and recovered. It’s important to stay focused on your plan and track progress toward your goal, not short-term performance.
About LRPC’s Monday Morning Minute
Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.
Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in sustainable investment strategies for retirement plans that incorporate Socially Responsible Investment (SRI) factors and Environmental, Social and Governance (ESG) elements. LRPC currently has contracts in place to provide consulting services on more than a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or email@example.com or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges, and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.
Additional Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request. Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. Investing involves risk including loss of principal. Diversification strategies do not ensure a profit and do not protect against losses in declining markets. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk. All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.