It’s been a rough few weeks for the stock market.
U.S. stocks fell sharply last week to levels just above bear market territory after some investors continued to worry about additional rate hikes from the Federal Reserve (Fed) based on recent inflation data reported in the Consumer Price Index (CPI) and Producer Price Index (PPI) reports and subsequent comments made by Fed Chairman, Jerome Powell at the conclusion of the 2 day Fed meeting, which took place last week.
The Possibility Of A Recession
The tone of the Federal Open Market Committee (FOMC) remains hawkish given policymakers are “highly attentive” to taming inflation that runs well above its 2% target. Strong job growth and persistent excess demand for labor suggest a soft landing is still possible. However, the probability of a recession sometime next year is elevated based on the Fed's tightening of monetary policy.
“The Fed tightening cycle does not always induce a recession, but since the Fed is acting particularly aggressively to combat nagging inflation, we see rising recession risks in 2023,” said LPL Financial Chief Economist Jeffrey Roach.
Potential Catalysts To The Upside - Inflation & Election
The stock market likes certainty and anytime there is uncertainty the potential for volatility increases. A potential catalyst to the upside for the markets could be improved inflation reports in September and October. The Fed will have more visibility going into their November meeting based on the reports to gauge how effective their policy has been. If inflation comes down then the Fed can take a less aggressive approach, which could cause the markets to rally.
Additionally, once the election is over and the outcome is determined - regardless of which party wins - the uncertainty surrounding the election will be eliminated and markets may be inclined to move higher as history has shown us during mid-term election years.
There has been a lot of comparison this year to how 2022 looks a lot like 1962 - a mid-term election year - supply chain issues, democratic president, bear market without a recession, Cuban missile crisis, etc. The S&P 500 didn't bottom until Oct 23 that year, however it did see a 19% rally into the end of the year.
Time-Horizon Is Key
The concept of buying low and selling high is ideal. However, it can also be difficult for investors as prices involve emotions and investor psychology. For investors with a long-term time horizon, now may be a good time to consider "buying the dip" with markets down approximately 20% from the January 2022 high.
"During times of volatility it's important to remember time horizon and to rely upon the planning that we've done together. As part of our planning with clients, we seek to align risk and time horizon for different portions of a client's portfolio," said Randy Eveland, CFP, RICP, CDFA, Wealth Advisor.
We anticipate near-term market volatility. There is a chance that the markets could rally into the end of the year based on the potential catalysts outlined above. It is important to remember that good investment decisions see beyond the current circumstances and that emotional decisions without a complete understanding can be counter-productive to your financial well-being.
If you have specific questions or would like to discuss your own investment strategy or financial planning needs, we welcome you to call us at 302.234.5655 or email us at email@example.com to set up time to discuss further.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
All index data from FactSet and MarketWatch.
Graph from Carson Investment Research FactSet 09/21/22.