What's Happening With The Markets Right Now (And How Investors Can Better Respond)?

The financial markets often experience volatility spikes. And when they occur, it’s beneficial to take a step back and assess what’s happening. Today, we’ll address the most recent market activity to empower investors to make strategic decisions with their long-term goals. Market dips are never fun, but it’s always better to face them with a robust plan and a trusted team by your side.  

Understanding Recent Market Movements

Overall, the stock market has been trending well over the last several months. Q4 is historically a solid period for the markets, and that tune rang true for 2021, even with the Omicron variant at center stage. However, a few sectors did see significant drawdowns that are beginning to make investors quite concerned, specifically growth companies and the NASDAQ index. The companies within these segments have continued their downward trend in 2022. Here’s a small snapshot of what we mean.

• Zoom (ZM): Down 60% from its peak

• DocuSign (DOCU): Down 60% from its peak

• Mercadolibre (MELI): Down 45% from its peak

• Sea Limited (SE): Down 50% from its peak

Is there good news? Yes! The latest financial reports that these growth companies reported in Fall 2021 show continued strength within the businesses, including substantial revenue growth, growing operating cash flow (Revenue - Fixed Expenses), and low debt ratios. These positive factors instill confidence that these companies (and several others like them) have the makings for solid long-term investments. However, as an investor, it’s an immense challenge to grapple with these short-term periods of volatility. In this case, what’s puzzling for many people is that the business’s vital signs are in the clear, and nothing has changed, like a loss in revenue, significant debt, unstable leadership, etc., to result in these lower stock values. So what’s pulling the strings?

4 Clear Factors Influencing the Volatility

While attempting to predict the market is a fool’s errand, we can examine several factors contributing to market activity over time. Let’s examine four causes for the sudden turbulence.

1. Inflation Is On The Rise

It seems like no matter where you look or who you talk to, the conversation is all about inflation. And yes, we’ve certainly seen inflation spikes—it’s currently sitting at 6.8%, the highest in decades. The COVID-19 pandemic and the fiscal and monetary policies born from it are the primary culprits. When inflation increases, investors get concerned because it represents a loss of purchasing power over time. However, one of the most important decisions you can make in a high inflationary environment is owning real assets (and stocks are real assets).

2. Interest Rates Are Climbing

When inflation is on the move, who are you going to call? The Federal Reserve. The Federal Reserve System, also dubbed The Fed, is the central banking system for the U.S., and the five people who sit on its board aim to keep the U.S. economy healthy and protect the public interest. To help curb the effects of inflation, the Fed begins to tighten the Monetary Policy (more on that below). They can do this in several ways: raising interest rates to slow the economy, purchasing fewer assets, and decreasing the money supply.

3. Federal Reserve Plans to Tighten the Monetary Policy

The Fed has a couple of plans to tighten its financial belts:

• Raise interest rates (potentially several times incrementally) throughout 2022

• Reduce the size of its balance sheet

What do these adjustments have to do with your investments? The markets tend to respond with more movement and fluctuation when talking about tightening monetary policy circles around, and as we saw, they did.

4. Supply Chain Issues

While many investors thought the supply chain issues would resolve themselves before the new year, that hasn’t been the case. Several reasons compound to make this issue so palpable, like the imbalance of supply and demand, capacity issues, labor shortages, pandemic-related restrictions, and more. The COVID-19 pandemic certainly exacerbated these problems, and the supply chain side of the economy has yet to get back to “normal” (even a new normal).

How Investors Can Respond with Strength

Perhaps the most important thing you can do in uncertain times is keep your eye on your long-term financial plan. Start by asking yourself this simple question: have your long-term goals changed? If you answer no, you’re best off staying the course. It’s important to recognize that you’re moving through a tough season, but prioritizing the long-term view could help put this blimp into perspective. Throughout your entire investment time horizon, you’ll experience periods that are more uncertain than others. The reasons driving them may change, but your response doesn’t have to. While you may not control the market movements, you control your reactions and how you proceed with your investment decisions. Sticking with your investment plan in turbulent times is a challenge for nearly every investor out there. But if you’ve built a strong portfolio with your goals, time horizon, risk tolerance, and risk capacity in mind, you’ve set yourself up to weather the storms that come your way with strength.

How We Can Help

At the Dala Group, we’re passionate about helping you create a comprehensive financial plan that puts you on the path to reaching your goals. We can help you build an investment portfolio that’s strategic, resilient, and tailored to your unique situation, like goals, risk tolerance, and more. Investing is a long-term practice, and when you have a portfolio built to last long-term, you can have more confidence to ride out challenging times. We would love to help you optimize your financial plan and ensure you aren’t missing out on the financial strategies that will put you in the best position long-term. Reach out today.