Do Not Panic! | The Investors Edge
By John Stewart, chief investment officer at Farmers Trust Co.
Week in Review: Fed on a Tightrope as Volatility Reigns
CANFIELD, Ohio — The Federal Reserve announced a one-half percent increase in its target Fed Funds rate this week, which was widely expected by market participants.
The central bank also plans to reduce its monster $9 trillion balance sheet at a rate of $47.5 billion a month starting next month.
Markets rallied on the news, presumably on the fact that the Fed didn’t announce anything more restrictive than was already expected. In addition, Fed chair Powell took the possibility of a 3-quarter point hike at the Fed’s next meeting off the table, which was something markets had been pricing in.
The tech-heavy NASDAQ index jumped roughly 5 percent from its intraday low to its closing high.
So is this the all-clear signal for the stock market? Our take is that it’s likely we’ll experience further market volatility in the months and weeks ahead given a still slowing economy and weakening earnings outlook. Therefore, we’re advising clients to stay relatively defensive for the time being.
Featured Insight: Never Panic
The first four months of this year were one of the worst starts to a year for financial markets in recorded history.
What has made this stretch particularly challenging for investors is that BOTH stocks and bonds came under intense selling pressure as prices for most all financial assets moved lower – typically, stocks and bond provide a bit of yin and yang in a portfolio – that has not been the case in 2022 thus far.
DO NOT PANIC!
Investors tend to lose money when they let their emotions take hold and sell their assets when they are falling in price. This is almost never the right course of action.
In the long run, stocks have always trended higher over time. Yes, there are occasional bouts of volatility. Some even last for many years. Nevertheless, you are rewarded as an investor for holding your assets. Selling into weakness eliminates your ability to take advantage of the long term trend.
Bonds actually have stated terms of interest and principal repayment. As long as they’re held to maturity, assuming the bond doesn’t default of course, you should never lose money on a bond. Don’t panic and sell a bond just because it has temporarily moved lower in price.
Looking Ahead: Quiet Period Ahead
With the Fed meeting out of the way and the bulk of first quarter earnings season behind us, the markets will have very little to key off of in the coming weeks.
Sure, we’ll still have some economic reports to sift through like next week’s monthly inflation reading.
Nevertheless, the market may become more vulnerable to geopolitical headlines as the war in Ukraine drags on.
Food and energy prices continue to push higher as supply issues seem unlikely to be resolved anytime soon.
As prices rise, the key risk becomes whether corporate earnings estimates will trend lower as consumer demand gets pinched and margins get squeezed by cost pressures. At the end of the day, it is still earnings that will determine the direction of the stock market.
Copyright 2023 The Business Journal, Youngstown, Ohio.