The stock market entered a bear market this week. So, what does a bear market mean for your portfolio?
We thought this would be an appropriate question to address because the year-to-date performance of the S&P down 22.50% on a total return basis, as of Thursday’s close. Bear markets are typically defined by a 20% or more decline in price from its previous peak. The one thing we know for certain is, eventually all bear markets come to an end. What we don’t know is how long they will last or how bad they will be. However, there are things that can be done to weather the storm.
Let’s define what is causing the stock market selloff. The current drivers of this bear market are inflation and higher interest rates. However, these go hand in hand as the Federal Reserve is raising rates to fight off higher inflation. As interest rates increase, there is a direct correlation to valuations placed on stocks. As we pointed out before, growth stocks will be the most susceptible to interest rate hikes. This does not necessarily mean the underlying business will perform worse in a rising rate environment. The decline in stock prices is related to the math Wall Street uses to value stocks, i.e., higher interest rates mean lower stock prices and vice versa.
This week the Federal Reserve increased the fed funds rate by 0.75%, with the Federal Reserve targeting 1.5% to 1.75%. The “dot plot” which measures individual Federal reserve member expectations has a year-end value of 3.4% on the fed funds rate. This is in response to high inflation numbers with the annual inflation rate for May at 8.6%.
The Fed has said they remain committed to fighting inflation and not letting it get out of control. Their recent interest rate hike, the highest since 1994, is proof that they are following through on their promises.
This might sound concerning but, the Federal Reserve is taking appropriate action to stabilize the economy. In the long run this will end up being a positive for the economy which should translate to being positive long term returns for your portfolio. We believe you can continue seeing market volatility as the Federal Reserve continues fighting inflation, but they will ultimately get it under control.
If you are in the accumulation phase and, do not need any distributions from your portfolio; this could be a great opportunity to start adding to your investment portfolios. However, if you are in the distribution phase, where you are living off your investments, you can be impacted to a much higher degree. That is why we developed the Personalized Asset Segmentation Strategy. We described the benefits on our latest monthly investment committee webinar. If you missed it, you can watch the recording by CLICKING HERE.
We will continue to keep you up to date on the market environment through the weekly outlook and monthly investment committee webinar.