During times of economic uncertainly and market volatility, we are often reminded that fear is generally a greater motivating factor than greed. It is during these times that prognosticators of doom gain traction, and individual investors make unwise choices out of fear of losing it all. While nobody can be certain of what the future holds, we can look to the past for clues and, in doing so, temper our reaction.
Downturns, like the one we are experiencing, generally signal a change in market leadership supported by structural changes in our lives.
At the beginning of the pandemic, we saw a decline in stock indices of about 30% as the economy shut down, and investors had to survey the landscape for opportunities. It quickly became apparent that the pandemic was going to last longer than most expected, and that meant the closure of brick-and-mortar shops, restaurants, and offices. The only way the situation would be tenable would be to shift huge parts of our lives online.
For months, you could buy a bicycle from Amazon, but not from Joe’s Bike Shop. The huge and almost instantaneous structural shift favored large national retailers with a strong online presence, and sufficient ordering and distribution channels. It favored companies that allowed us to remain productive in our occupations from anywhere. It favored restaurants that already had online ordering, and it forced others to catch up or perish. An entire generation that largely feared technology was forced to adopt it in order to check in with their doctors. We were fed endless options for streaming entertainment.
Last year, as the pandemic began to wane, we saw some semblance of normalcy. People were going out to dinner again, neighborhood stores were reopening, workers were returning to the office, Pelotons became coat racks, and we walked away from our televisions to picnic and see friends. Structurally, our lives and the economy were correcting, and we’re seeing that reflected today.
We are experiencing higher inflation than we’ve seen in two generations, and interest rates are rising substantially for the first time this century. There is a war in Europe that is forcing the world to reconsider its strategic sourcing of energy. The stock market is digesting competing information as it attempts to find direction and opportunity.
Remember, the markets don’t care about good and bad on an absolute basis. Those terms are meaningless. Markets care about better and worse, on a relative basis. Money flows happen from areas of less opportunity to areas of more opportunity. Right now, markets have largely decided that those companies that made our lives bearable during a pandemic, don’t necessarily present the same upside potential during more normal times. As a result, the NASDAQ is down 23% YTD, as of this morning (6/6). For the most part, those companies aren’t any different than they were, it’s the world that changed. Those companies aren’t necessarily bad, markets believe they’re just relatively less good.
Investors invest. That’s what they do. We don’t believe the sky is falling. It would be unwise to think so, as fearful as you may be. We believe the markets will find their direction and areas of opportunity, as they have done during every downturn in history. We see no reason that this time will be different.
Continue to work closely with your Certified Financial Planner professional to help make sure you are able to keep fear in check while you and the markets find direction.
Stephen Kyne, CFP® is a Partner at Sterling Manor Financial in Saratoga Springs and Rhinebeck.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Forward-looking statements are subject to revision. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Investing is subject to risks including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Securities offered through Cadaret, Grant & Co., Inc. Member FINRA/SIPC. Advisory services offered through Sterling Manor Financial, LLC, or Cadaret Grant & Co., Inc., SEC registered investment advisors. Sterling Manor Financial and Cadaret Grant are separate entities.
