Broker Check

Embrace Discipline & Balance

January 31, 2022

Market Volatility Calls for Discipline

We've always emphasized the importance of a diversified strategy based on one’s risk tolerance is prudent for long-term investing. The example of two recent U.S. equity market trading days helps reinforce that message.

On January 20, the markets rose solidly throughout the day, with the Nasdaq, best-known for technology stocks, up nearly 2% at its highest point. But the gains evaporated in a flurry of late selling. Just two business days later, on January 24, the situation presented itself in reverse. The Standard & Poor's 500 Index of the largest U.S. companies was down by as much as 4% yet finished in positive territory after a late-day surge – a real roller coaster ride.

We've always believed that, for long-term investors, not paying attention to the day-to-day is a wise strategy.

What’s Ahead – More Volatility

Two of the biggest developments in the financial markets this year —

1, Accelerating inflation and 2. Pandemic that just won't quit—we're living with every day. The Federal Reserve appears to be acting decisively to contain inflation, which will result in more volatility ahead, along with the potential for losses in a stock markets that low interest rates have fueled.

But it remains possible to maintain perspective through understanding history. Volatility, as the illustration shows, is a constant that tends to spike when stock markets endure valleys.



Sources: Data from Refinitiv DataStream through January 21, 2022

Remember, these inevitable valleys have given way over time to new highs. It's why investing the long-term such as 5 to 10 years and retirement works. And it should be our goals that govern our approach to investing. These goals are the foundation for success and realistic investing returns.

A Time to Embrace Balance & Discipline

Note, our guarded, though not bearish, long-term equity return outlooks are positive. The course of the year ahead will be volatile and influenced by how policymakers, and still-growing economy through fiscal and monetary support that had been required to withstand the early stages of the COVID-19 pandemic.

The fixed income outlook is more guarded. Although interest rates remain historically low, modest rises by the Fed is expected to move fire higher. 

The way forward promises to be a balancing act between the Fed’s monetary policy and political activity, one that could carry significant implications for economic growth, inflation, and investment returns. Their jobs won't be easy. For us we will be challenged with continued market corrections of 10 to 15% or more from recent highs.

The message, as always: Maintain perspective, given the fiscal stimulus and the Fed the market has weathered three incredulous years exceeding normal market growth. The correction has been expected. Tune out the day-to-day noise that can lead to impulsive decisions, be true to your goals not the market, and put your faith in a history that has rewarded those who embrace the long term.