24 Jan Insights on the Recent Equity Market Volatility
As of today, and since early January, the S&P 500 has fallen by ~11% and the NASDAQ has fallen by ~15%. To put this drop in historical perspective, markets have returned to levels of July 2021. The likely cause of this decline is the specter of rising interest rates combined with high valuations. We expect this volatility to persist due to the Federal Reserve’s current tightening posture and the likelihood of higher interest rates to combat potential inflation.
While markets often “overshoot” to both the downside and upside, we believe that this market environment calls for investors to remain patient and wait for a potentially more attractive entry point. Due to inflation pressure, high valuations (even given the recent drop), fading stimulus, and a tightening Fed, we believe that the probability of further downside outweighs the potential benefit of a quick recovery. In this regard, we are not recommending any broad action as clients are generally at or below equity targets as equities and fixed income remain expensive and will likely be subject to multiple/price compression if interest rates continue to rise.
Our view is that long-term investors should remain patient and diversified, as a long time horizon and diversification are a portfolio’s “best friends” in turbulent markets. A correction like this is generally healthy for markets as it reduces speculative behavior and may provide an attractive entry point for patient, long-term investors. If we believe this entry point has arrived, we will reach out to clients to recommend appropriate actions.
As Peter Lynch noted, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”