Investors have grown uneasy as stock and bond markets have recently swung in both directions. Although last week’s jobs report confirmed that the economy is recovering steadily and the new $1.9 billion stimulus package will provide even greater support, there are fears that the market has run too far too fast.
Experts view rising rates in one of two ways
At the moment, there are two views on the recent jump in interest rates. Rising rates could mean that:
- The economy will overheat, spark runaway inflation, and force the Fed to pull the plug (raise interest rates and move away from accommodative policy) sooner than expected, all of which may be bad for valuations of both stocks and bonds.
- They’re the normal result of a recovering economy, which is good for stocks in the long run.
The tension between these two views is creating market uncertainty
At the moment, there aren’t many reasons to believe the former is more likely:
- Long-term interest rates naturally rise early in any economic recovery and the yield curve was much steeper in the early stages of the last two cycles.
- While there may be reflation (a return to global growth) as prices recover from the economic shutdown, low inflation is a product of decades-long global forces that have little to do with COVID-19.
That said, many sectors have performed exceptionally well over the past year and valuations are certainly elevated.
The uncertainty itself can affect the markets
In many ways, how everyday investors react to uncertainty is often more important than what they are reacting to. It isn’t simply that there are always worries on investors’ minds whether it’s the pandemic, federal deficit, retail investor trends, tech stocks, and other issues. It’s that, for many, every episode of market volatility feels different.
Chart: S&P 500 returns over 10-year, 5-year, and 1-year rolling windows. Returns are larger and more consistent over longer timeframes.
Source: Clearnomics, Standard & Poors, March 8, 2021
OK. So is there a disconnect between perception and reality right now?
Possibly. The biggest hurdle to achieving financial goals is often overcoming one’s own behavioral and cognitive biases. Market ups and downs are to be expected. Although the last several weeks have felt volatile — no doubt amplified by daily headlines and coverage — the reality is that there has not even been a 5% pullback in the S&P 500. The stock market has fallen 20 days this year but has also risen 23 days, close to the slightly-better-than 50/50 average across history. There is often a disconnect between perception and reality when it comes to market behavior.
The takeaway for investors? Keep calm and carry on.
The key for long-term investors is that the stock market tends to rise over long periods of time even if it can swing wildly in the short run. How can this be if there are almost as many down days as up? The fact that markets are up slightly more than 50% of days compounds over time. On a monthly basis, the stock market has risen more than 60% of the time going back 30 years. On an annual basis, this percentage jumps to over 70%. Since 2003, the stock market has been positive 78% of years.
Make sure your portfolio is built to last — and to manage risk
While there are valid market concerns around interest rates, valuations, the Fed and fiscal stimulus, the bottom line is that the economy is still recovering. Patience, discipline, and perspective are needed as this plays out. If you’re looking for an investment mix that’s designed by investment experts to manage risk and take advantage of the opportunities for gains — and adjust automatically to stay on course over the long-term, MoneyLion can help.
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