In times of market volatility it’s important to ground ourselves by evaluating the strength of the economy and focus on that which we can control. While the market and economy are correlated, the market can be emotional and unpredictable – making it all the more prudent to watch the fundamental elements that more directly reflect economic activity.
As we move toward the second half of 2022 and beyond, we are following key economic indicators and advising clients on strategic actions they can take to withstand volatile markets.
What we are seeing
On a fundamental basis, several key economic indicators remain healthy, despite some concerns:
- Unemployment: The unemployment rate has held steady at the historically low rate of 3.6% for several months. Jobs continue to be added, suggesting that we may recover from pandemic job losses by July 2022.
- Corporate Earnings: Heading into the Q1 corporate earnings reporting season, corporate earnings were expected to increase 4.5% but ended up increasing ~9%. From a long-term perspective, corporate earnings are closely correlated to the market trajectory, meaning that as corporate earnings growth increases, the market should continue to grow as well. In the short term corporate earnings can be uncorrelated, however the market historically corrects itself to follow the path of corporate earnings.
- Inflation: The Fed has committed to tackling inflation, as evidenced by the most recent increase in the federal funds rate (increased rate by 75 basis points, or 0.75%). Their verbiage has indicated that they will likely increase rates at this level at the next meeting or two before reevaluating future rate changes.
Strategizing financial plans
Taking stock of what you know about the economy and market, it’s important to maintain perspective amid market volatility. Consider your financial goals – long-term, not just short-term. Understand that historically, approximately seven out of every ten years sees a positive market but even in most positive years, there is a point in time where the market will drop 10-14%. More often than not, the market recovers from those dips and the year ends more favorably than when it began.
Periods of time that feel unstable are a reminder that asset allocation and a diversified portfolio matters. Dips in the market provide an opportunity to make tweaks and turn the dial up and down in terms of aggressiveness. For instance, we may want to be a little more aggressive when we see a tremendous pullback so we can find ways to benefit when the market rebounds.
At any given point in time, it is critical to manage reserves and to find asset classes performing well across the market so that liquidity can be generated as needed. While well-designed asset allocations and diversified investment strategies generally account for this, keeping a pulse on the market will allow you to make small adjustments that keep you in line with your goals.
Overall, maintaining a commitment to your long-term financial strategy can be the most prudent way to withstand market volatility. Reacting to short-term fluctuations by overhauling an investment strategy has the propensity to backfire.
At Certus Wealth Management, we help our clients develop, adjust, and maintain strategies in the context of their long-term goals. To discuss how to implement an informed strategy designed to help you reach the financial future you want, please contact us.