This blog's content was taken from episode 245, "7 Rules From an Investing Legend"
You can go check out the whole episode here:
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A Volatile Market
One thing we can guarantee is that the market is volatile. It has been volatile, is volatile, and will continue to be volatile.
The markets we’re seeing right now or even from the past 3 or 4 months proves this. You have the markets and think “oh, inflation is not as bad as we thought” but then the next day you realize the economy is slowing down. You have a zigzag pattern going on where when people focus on inflation the markets go up and when there’s a focus on overall reduced earnings they go down.
S&P 500 Bad Returns
One thing to note is that historically, looking at data around a one year timeframe tells you nothing about performance in the following year. There is no historical correlation. It’s a completely arbitrary calendar year timeframe.
In 1931, S&P had a draw down of 43.8% and then the next year it was down 8.6%. Then in 2008 it was down 36.6% and rallied 25.9% the following year. In 1937, it was down 35.3% and the next year it rallied 29.3%. In 1974, it was down 25.9%. The list goes on and on.
These are huge numbers. 30% on the downside, 30 the next year. Last year we had 19.4% down in the S&P and now we’re up 10% in the month of January. This is a reminder that while historically, the market has done around 10% on the S&P 500 it almost never does anything even remotely close to that.
Volatility is the name of the game.
Fed Rate Increase
Sometimes when the markets react in one way or another it has nothing to do with a rate hike but rather because Jerome Powell or one of his lieutenants gives a specific speech to hammer a point.
The Fed announced that they would be increasing the rate by 25 basis points. They anticipate additional smaller rate increases to make interest rates sufficiently restrictive to bring inflation back down to 2%. Powell also stated that interest rates will remain elevated for some time.
There’s a difference between the approaches of the Fed and the Bank of Canada. The Bank of Canada said that they would pause rate increases for now with the prerequisite that they see inflation continue to trend.
A quote from the press conference embodies what Jerome Powell said, “inflation data received over the past 3 months show a welcome reduction in the monthly pace of increases. While recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path”
The markets rallied when the news of interest rate hikes came out. Don’t be surprised if the markets rally between positive and negative based on the economy slowing down and inflation expectations.