The Market Update by Tim
Fears of a widespread banking crisis did not hinder financial markets during the first quarter of 2023. Stocks (the S&P 500 Index) posted a generous 7.5% gain to start the year, while the U.S. Aggregate Bond Index also rose a very respectable 3%. As the saying goes, stocks often climb a “wall of worry,” and they’ve started strong despite several lingering concerns.
Inflation has now been on the worry list for nearly two years. Though still uncomfortably high at 6% year-over-year, the trend has been downward, as the rate has now declined for six consecutive months. Cooling inflation data has fueled some optimism that the Federal Reserve may be nearing the end of rate hikes, which is the light at the end of the tunnel that markets seem to be seeking.
The battle against inflation has close ties with another worry – an economic recession. The goal of interest rate hikes is to slow economic activity, and as a result, cool down inflation. But it can be a fine line between slowing enough and slowing too much… the difference between a “soft” or “hard landing” as the economic pundits like to say. There has been plenty of discussion regarding recession risk, putting it in the category of a “known unknown” in the Rumsfeldian lexicon (if that sounds like meaningless gibberish, you are likely under the age of 45).
The slate of fears, risk and concerns is certainly not blank, but that may not be a bad thing. When everything looks rosy and confidence is high, it’s easy for markets to get pummeled by the unanticipated. In the words of Roman philosopher Seneca, “What is quite unlooked for is more crushing in its effect, and unexpectedness adds to the weight of a disaster.” The Stoics actually practiced “negative visualization” to become desensitized to bad things that could happen, and to a certain extent, that may apply to markets as well. When the markets focus on what could go wrong, it’s far easier for them to be pleasantly surprised. A mild recession might be considered a positive outcome relative to other scenarios. Everything is relative.
The start of 2023 is one more reminder that all clouds don’t need to clear before financial markets respond. A 7.5% gain would make for a pretty decent year for stocks, yet that occurred in a matter of three months. We can’t predict the remainder of the year, but we know it doesn’t need to be worry-free for investments to perform well.
Market swings are inevitable, and since gains often come at unexpected times, it’s important to stay the course in order to benefit. Your financial plan allows us to construct your investment policy around your ability to accept investment volatility without endangering your financial future. That is the beauty of our comprehensive approach!
