06/21/2022
How Does Inflation Affect the Stock Market?
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It’s normal to feel anxious about recent volatility in the stock market, plus the reality of high inflation and rate increases by the Federal Reserve. You might be surprised to learn there’s positive news during these times of market uncertainty. Read on for a few important points that can help you understand and plan for the impact of inflation on your portfolio.
The Stock Market Helps Keep Up with Inflation
Inflation is one of the reasons we invest. By investing in the stock market, you have been preparing for this moment. From 1914 to 2022, U.S. inflation has averaged 3.25% annually. The S&P 500, on the other hand, has had an average annual return of 10.49% from 1926 to 20211. By investing over the long term, you have been combating Inflation and building wealth.
Dig Deeper into What’s Causing Inflation and How You Should Respond
While inflation isn’t positive, its story is far more than just higher gas prices and food costs. Some of today’s rising Inflation is caused by factors that may indicate a strong economy. While there are hurdles to overcome, some inflationary pressures stem from beneficial market forces (which can lead to positive market trends in the long term).
While inflation isn’t positive, its story is far more than just higher gas prices and food costs. Some of today’s rising Inflation is caused by factors that may indicate a strong economy. While there are hurdles to overcome, some inflationary pressures stem from beneficial market forces (which can lead to positive market trends in the long term).
Remember, You’re in It for the Long Haul
Looking at the market day by day may cause despair. What happens in one day doesn’t matter – it matters what happens on all the days. Consider this perspective: Since 1970, the average rolling annual period saw advancement from stocks around 80% of the time. However, over rolling 10-year holding periods, stocks are up over 92% of the time, and they’re higher 100% of the time for all rolling 15-year periods. That means those with a greater than 10-year investing time horizon have an excellent chance of achieving positive returns.
Looking at the market day by day may cause despair. What happens in one day doesn’t matter – it matters what happens on all the days. Consider this perspective: Since 1970, the average rolling annual period saw advancement from stocks around 80% of the time. However, over rolling 10-year holding periods, stocks are up over 92% of the time, and they’re higher 100% of the time for all rolling 15-year periods. That means those with a greater than 10-year investing time horizon have an excellent chance of achieving positive returns.
The cliché that it’s not about timing the market but time in the market is true. Since 1988, just missing a few of the best days in the market has resulted in significant lost opportunity in long-term returns. And over time, many of these best-performing days occur around and after a bout of market volatility, underscoring the importance of remaining committed to your investment plan.
Want to Learn More?
We are here for you. If Inflation and volatility in the markets have you uneasy, join us for more in-depth discussion on the topic. On Thursday, June 23rd our Advisors will host a live webinar on Inflation and the Markets. RSVP here to attend online or in-person. Lunch will be provided for those who RSVP to attend in-person. Food will be served at noon and the seminar will begin at 12:15 pm.
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the markets-
returns through 06/17/22
U.S. equities retreated for the week S&P down -5.75%. Small caps also decreased but underperformed their large cap counterparts with the Russell 2000 shredding -7.43%. International stocks outperformed domestic equities, but still in the red down -5.73%. Emerging markets were negative returning -4.65%. U.S. Investment-grade bonds were negative with the Bloomberg Barclays U.S. Aggregate Bond index down -0.92%.
ANOTHER BEAR - When the S&P 500 closed at 3667 last Thursday 6/16/2022, the index was down 23.6% from its all-time closing high of 4797 set on 1/03/2022, i.e., qualifying as a “bear” market decline of at least 20%. The drop was the index’s 11th “bear” since 1950 but its 2nd since the start of the global pandemic. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. It is a market value weighted index with each stock's weight in the index proportionate to its market value (source: BTN Research).
IT MAY TAKE AWHILE - After suffering 10 separate “bear” markets between 1950 and 2021, the S&P 500 recovered and eventually achieved a new all-time closing high each time. The average length of time it took to retrace its steps from a “bear” market low to a new closing high was 25 ½ months or more than 2 years. The quickest recovery for stocks took place over just 3 months (in 1982) while the longest recovery took 70 months or nearly 6 years (between 1974-1980) (source: BTN Research).
TREASURYS - As of the end of fiscal year 2021 (9/30/2021), the Fed held more than twice the level of Treasury securities ($5.4 trillion) as held by Japan ($1.3 trillion) and China ($1.0 trillion) combined (source: CBO).
NOT A HAPPY CAMPER - “Consumer sentiment” of the American shopper, an indicator of how optimistic consumers feel about their finances, fell in June 2022 to its lowest level ever. “Consumer sentiment” has been tracked monthly since January 1978 (source: University of Michigan).
Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance cannot guarantee future results.
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect again loss. In general, the bond market is volatile; bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer term securities. Any fixed-income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds or high-yield bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets.
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