Hope all is well with you. Stocks fell for the third week in a row, with major U.S. indexes posting their sharpest weekly declines since March 2020, early in the pandemic. The NASDAQ dropped nearly 8%, the S&P 500 fell almost 6%, and the Dow gave up nearly 5% as investors worried about everything from rising interest rates to geopolitical conflict in Ukraine. I have broken down this week’s news using Meat Loaf song and lyrics, the rock star passed away on Thursday.
There were things I’d never do again but then they’d always seemed right. It feels easy to panic and sell when the market is going down, but I implore patience. The drop in the stock market is not as much where rates are, but how they got here. Ten-year Treasury yields touched 1.9% last week before settling back by week’s end. Common sense tells us rates are still quite low by historical standards, but it’s the speed of the move higher that has made investors jittery. Rates rose more than 0.5% since early December. Recent history can be a guide. We saw similar rate episodes last year, which included a 0.7% spike between January and March, and another 0.5% jump between August and October. Each episode sparked separate pullbacks in the stock market, but ultimately saw equities rise. A similar experience is transpiring currently, with stocks experiencing a temporary pullback as longer-term rates shift to reflect inflation pressures and tighter Fed policy.
They say (Crypto) crashed and burned, I swear (investors) never learn. The price of Bitcoin dropped more than 10% for the week—with most of the decline coming on Friday—as the cryptocurrency fell below $40,000 for the first time in nearly six months. In early November, Bitcoin traded as high as $67,000. My position on crypto has not changed, if you purchase crypto it should only be with money you can afford to lose. It is far too volatile to have a significant portion of your net worth in.
The excitement and thrill of seeing your money jump in value like it has for much of the past few years can cause you to lose focus and jump out of the market at the slightest hint that party is over. The volatility has been extreme particularly in the NASDAQ. Friday was the index’s lowest closing level in seven months perhaps has you feeling cold and lonely in the deep dark night. The first rate hike does not the end of the expansion. Tighter monetary policy does eventually cause economic and stock-market downturns. But not yet. The run up to the initial rate hike in a Fed tightening cycle is often accompanied by a rocky patch in stocks, which is what we are seeing now. During the last four rate hike cycles (’94, ’99, ’04, ’15), the median move in the S&P 500 in the three months following the first-rate hike was -1.6%. However, six months out, the median gain was 7.4%, showing that it takes for the markets to adjust. Yes, inflation is glowing like the metal on the edge of knife but the pace at which it is growing is starting to slow. Fed-tightening cycles are born from economic expansions that are hitting their stride, and there is a good chance 2022 will mirror the previous 4 cycles.
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