MGFS Special Edition – Volatility And The Return To Normal
We hope you are healthy and staying warm!
The market has experienced volatility over the last few weeks. Such volatility seems familiar when we think about specific historical events such as the financial crisis, the US credit rating be devalued, the oil crisis, and Covid. However, it is very important to understand normal market volatility (and we haven’t had it for a long, long time). Like you, we are regularly consuming a lot of information about the economy and market that can cloud investor decision-making to create, maintain, and use wealth. Our goal is to provide you with a clearer lane to help you reach your financial success.
Having reviewed a few commentaries this week, they are varied.
One economists suggests the supply chain is fine with the data showing record levels achieved in 2021. The problem is really a demand issue; there is too much money chasing too few goods. This line of thinking is thoughtful and forecasts higher inflation, interest rates, and market volatility.
Another economist suggests the next year of inflation will increase as reflected by an ongoing twelve month average inflation number where the earlier and lower months continue to fall off and the hot, growing economy add higher months of continued price increases and consumption – of course showing a higher average inflation rate. With this phenomenon, they compared the next year of inflation continuing to grow around the 7- 8% range while the next three years showing the average will continue on a lower path and plateau for inflation around 3-4%.
And yet another economist shared a view around what has happened when rates rise historically and a reminder about market volatility and normalcy. Over the last few years, without the Covid drop and recovery, the market experienced extraordinary growth for investors. It is easy for investors to anchor their expectations on such past outcomes to forecast future market results. It is also easy to experience recency bias, witnessing the current volatility, the moderate impact on portfolios, and the potential to see this trend sustained or worsen. These very human responses to the environment are captured by behavioral finance, which has garnered great attention since the early 2000s (coincidentally a timeframe also experiencing volatility) when Daniel Kahneman won a Nobel Memorial Prize in Economic Sciences on behavioral economics and investor decision-making. We need to be careful about the hunt for a crystal ball!
Practical, as we try to be, whether inflation and interest rates continue to rise or decline, they will do as they do. We believe it will be helpful to provide you with a quick summary and snapshots showing historical market impact from interest rate increases and what normal volatility looks like. Please take a moment to click this link to consider the possibilities in the return to normalcy.
Having the right plan and portfolio will help you endure with greater confidence. We look forward to speaking with you.
Adam L Schwartz, Partner, CFP®, NSSA®
Barry E Moschel, Partner, RICP®, CLU®, ChFC®, CPA
Tom Manno, Partner, CFP®, CPFA™