A steady hand is often best in stormy (financial) seas

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Financial markets began to show signs of stability in March after the wild ride they have been on all year. Investors continued to worry about inflation, Fed rate hikes, and the war in Ukraine. However, markets also rebounded off their lows and finished the month higher. The S&P 500 rose 3.6%, the Dow climbed 4.1%, and the Nasdaq grew 5%, although all three indices are still negative on the year. The VIX index of volatility fell to 20.56 from 33.32, a sign that markets have calmed a bit. The 10-year Treasury yield jumped to about 2.3% after the Fed raised rates. What drove these moves in March?

  • The Fed began raising policy rates for the first time since 2018. Investors have been anticipating these rate hikes for months as inflation rises and U.S. economic growth remains robust. Fed rate hikes are not only normal during economic expansions, but they make sense today, given the strong economy and rising prices. The Fed is expected to raise rates seven times in 2022, probably with one quarter-point rate hike per meeting.
  • The stock market began to turn around after the Fed made its announcement. Although the S&P remains down 5% on the year and the Nasdaq is still near correction territory, both did better in the second half of March. This is a classic example of “sell the rumor, buy the news,” in which investors worried so much about the possibility of rate hikes that, by the time they happened, this was already priced into the market.
  • Historically, markets recover from corrections within months. While the past is no guarantee of the future, history shows that markets tend to recover within months (four on average) after falling 10% or more. In fact, these recoveries often happen when investors least expect it and when the situation seems most dire. 
  • Interest rates have broken out. The interest rate on the 10-year Treasury finally rose above 2% — climbing as high as 2.47%. Investors have been anticipating this for over a year, when interest rates first jumped in the first quarter of 2021. Higher interest rates are positive for savers and those looking for portfolio income. However, they can also present challenges for existing bondholders and borrowers.

Markets can recover for long-range growth

March is a reminder for investors to stay invested and focused on the long run, regardless of what headlines suggest. This is especially true when investors and the media focus too much on the Fed and other events. History shows that markets tend to recover from these types of concerns, even when they involve rate hikes, wars, and more. In some cases, constantly being afraid of possible pullbacks can cause investors to miss the upswings, especially when they occur unexpectedly.

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Gasoline prices have spiked across the country, as seen in the chart above which shows the average price of regular unleaded. This will drive inflation higher and could impact consumer pocketbooks.

Sources: Clearnomics, American Automobile Association, Clearnomics, Nasdaq, Standard & Poor’s, CBOE, Federal Reserve

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