Volatility Returns

Volatility has returned to the markets. Why? There are questions about slowing growth in the economy. Let’s break it down to figure out how you should react.

We’ll start back at the beginning of 2022. That’s when the Fed announced it was going to start hiking rates to combat inflation. The market assumed those higher rates would eventually cause the economy to fall into recession. For nine months, the markets sank.

But, then in the fall of ’22, we still hadn’t seen a recession. Consumers were continuing to spend and the market responded by shooting higher, believing maybe the initial fears of a recession were overblown.

But, then in the fall of ’22, we still hadn’t seen a recession.

We also got to fall in love with a new story that could drive that resilient growth even faster: artificial intelligence.

So, hand-in-hand they went, consumers continued to spend, making today’s economy look bright. And, AI continued to be built out, making tomorrow’ economy look even brighter.

However, over the last few months, we’re starting to see some cracks in both of those stories. Consumers seem to be weakening and investors seem to be getting anxious about when AI will ultimately deliver on its promise to revolutionize productivity.

However, over the last few months, we’re starting to see some cracks in both of those stories.

Let’s start with the economy. The government’s latest jobs report confirmed what we’ve been seeing in the weekly jobless claims—the labor market is softening. More people are filing for claims and staying on unemployment longer.

The economy added fewer-than-expected jobs last month and the unemployment rate ticked up more than forecast to 4.3%. That still represents relatively low unemployment. But, it’s the rate of change here that’s meaningful. Remember, early last year, the unemployment rate was nearly a full percentage point lower.

Meantime, many of the company’s earnings reports I’ve read, point to a consumer that’s becoming more discerning in how they spend. I’m hearing that from travel companies and luxury brands to grocery chains and other companies that sell necessities.

Meantime, many of the company’s earnings reports I’ve read, point to a consumer that’s becoming more discerning in how they spend.

On the AI front, the buildout continues to accelerate. Mega cap tech companies continue spending at a rapid clip, believing the rewards are going to be enormous. But, for the moment at least, the market seems to be getting a bit nervous as to when we’ll see meaningful revenue and profits from those endeavors.

This is the problem when all the good news is baked into the price. Even just slight changes in perception can cause turmoil in the markets. That’s true of the AI tech companies and of the market in general.

This is why we talk a lot about fundamentals in this newsletter. This is why we talk about the real pricing of investments —how much you’re paying for every dollar of earnings. They may not matter much in the short-term, but they weigh heavily over the long-term.

This is why we talk a lot about fundamentals in this newsletter.

So, what should you do with this recent selloff? First, understand where you are in your investing journey. Understand how far you are from your goals. If you’re 35, you may be at least 20 years away from retirement. When it comes to your 401k or IRA, these selloffs are your friend. You have lots more money to throw into those accounts in the future so lower prices are a benefit to you.

But, if you’re 57, have built up sizable savings and are looking to retire in 2 or 3 years, your future investment is quite limited. You’re about to reverse course in a major way. Soon, you’ll be done funding your account and will instead move into the distribution phase. You’ll be pulling money out of your account. Even if your investments remain flat, you’re going to see the value drop as you take money out.

A selloff only compounds that problem. A 10% drop requires an 11% gain to get back to even. A 20% selloff requires a 25% gain to combat the loss. A 50% selloff requires a full doubling–a 100% gain–to offset the drop.

A 10% drop requires an 11% gain to get back to even.

This is why it’s crucial to better understand the downside risks of your investments. They matter far more as your wealth grows and your timeframe shrinks.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.