Financial markets news: 2022 midyear review
Looking beyond the headlines
The difficulty of market timing and the value of diversification
Performance among asset classes, whether stocks or bonds, can vary widely from year to year, especially during bear markets and their recoveries. If a portfolio is diversified across a range of asset classes, it may create the opportunity to capture attractive, though unpredictable, asset class returns.
Think again about moving into cash
It’s next to impossible to time the markets and to know which asset classes or individual securities will be the best performers from year to year (see visual above). It’s only logical, then, that you can’t predict market tops or bottoms either. That’s why, we believe moving part or all of your portfolio into cash as a way to avoid further portfolio losses has its own risks.
- You likely won’t be able to time when to reinvest to fully capture large recovery rallies, rallies that your portfolio would need to make up lost ground.
- Some of the biggest one-day rallies have occurred when expectations have changed during bear markets. That’s because markets are forward looking.
If you partly liquidate your portfolio and place that cash in a money market account, then you will have locked in those market drawdowns without the potential to benefit fully from an equity market recovery.
In addition, yields on those money market accounts are far below the rate of inflation, so your cash would be losing purchasing power.
Still unconvinced? How about a metaphor. Let’s say you’re driving from New York City to Los Angeles. When you get to Chicago, there is a maddening traffic jam. After an hour of being bumper to bumper, you decide you will make more progress by walking. Do you really get out of the car?
Over the decades, the stock market, as represented by the S&P 500, has recovered from steep declines brought on by economic recessions.
We believe the market has priced in expected rate hikes and the possibility of a recession.
- The stock market can be a leading indicator, but not always an accurate one. Since 1965, we have had 10 bear markets, but eight recessions.
- While there remains a lot of uncertainty about whether the Fed can achieve a soft landing, there is always uncertainty in the markets.
- Since 1946, it has taken 14 months on average for a bear market to hit its bottom. Our planners use a financial planning process that accounts for more than one to two years. For many clients, the process accounts for 20 to 30 years or more.
Because both bull and bear markets are natural parts of the economic cycle, our planners incorporate them when planning for our clients’ financial future. That’s why our planners may discuss having cash reserves and insurance strategies and may review client’s discretionary expenses – all to help protect our clients’ wealth. We are their partners and want them to have the flexibility to navigate what lies ahead to achieve their long-term financial goals.
The Fed has a tough challenge ahead of it. Not all factors fueling inflation are in the Fed’s control, like the war in Ukraine. The question is: How does the Fed execute an intense monetary tightening regime without driving the economy into a recession?
It’s natural to be unsettled about the possibility of a recession. Let’s remember economic slowdowns, and even recessions, are simply a part of the economic cycle that can lead to periods of solid growth. There are ways to help gird your finances for economic weakness, for example, setting aside cash reserves that provide for you over a one- to two-year period.
We agree with most economists that heightened inflation is not here to stay and expect it to ebb over the next couple of years, with some key drivers being transitory, such as China’s lockdowns. We don’t believe two or three years should impact your long-term financial planning, which may assume a period of 20 to 30 years if you’re retired, and more if you aren’t yet.
- Robust labor market
- Strong consumer spending and wage growth
- Supply-chain issues may get some relief
It may be helpful to look beyond aggregated government data on inflation like the Consumer Price Index and think about your “personal inflation rate.” For example, which of your ongoing costs have risen? A planner can discuss with you how you may want to adjust your finances to manage your personal inflation rate.
We expect the Federal Reserve’s rate hikes will create an economic slowdown. That’s what they are intended to do. While a recession is a possibility, we don’t see it as a foregone conclusion.
CONSIDER THESE FACTS:
- The second quarter 2022 Survey of Professional Forecasters, a group of prominent economists, still forecasts the U.S. economy to grow in 2022 and 2023.
- The healthy job market is supporting solid consumer income and spending.
- Market-based indicators expect a decline in heightened inflation over the next two years (see chart below).
Follow the data, not your emotions. Fears of a recession don’t predict actual recessions. If you have any concerns or questions about how a potential recession will affect your finances, please don’t hesitate to contact an Edelman Financial Engines planner. We’re here for you.
The market is signaling an inflation decline
The first half of 2022 saw inflation rise to over 8%, its highest in 40 years. But market indicators see the rate of inflation declining in the next two years and “normalizing” to around 3% five years from now.
Questionnaire: Should you consult with a financial planner?
Answering “yes” to even one of these questions may mean it’s time to consult with a planner.
- Are you retiring in less than three years and wondering about how the market’s decline will impact your plans?
- Tax codes change every year. Have you updated your tax strategies?
- Have you changed jobs or are you thinking of changing jobs?
- If you are in retirement, do you think you may need to change your withdrawal rate?
- Estate plans need to be reviewed every three to five years or when life changes occur. Do you need to revisit your estate plan?
Investing strategies, such as asset allocation, diversification or rebalancing, do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. All investments have inherent risks, including loss of principal. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Past performance does not guarantee future results.
An index is a portfolio of specific securities (such as the S&P 500, Dow Jones Industrial Average and Nasdaq composite), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.