What Caused Last Week's Volatility? Our View on the Markets:

May 9, 2022

The first quarter’s challenging market environment continued into Spring.  And, as we saw last week, volatility is on the rise.  Concerns abound, with no apparent end in sight.  Let’s look at the contributing factors.

First, the nation’s economic activity fell by 1.4% in the first quarter, versus expectations of a 1.0% gain.  Inflation remains unconstrained, and fears are growing that the Federal Reserve will be forced to raise interest rates faster and higher than previously expected.  The odds of the Fed’s ability to engineer a ‘soft landing’ are lengthening.

So why did the equity markets rise so far on Wednesday (over 900 points!), only to give it all back – plus some – on Thursday?  The immediate causes are straightforward.  The Fed raised short term rates by 0.5% — the biggest single step in over two decades.  At the same time, Fed Chair Powell said that larger increases were not under consideration at this time.  The day’s advance was characterized as a ‘relief rally’ from this statement.

Thursday’s reversal was a return to reality.  Increases in food, energy, and housing costs show no significant signs of abating.  The Fed remains well ‘behind the curve’ in addressing inflation.  Interest rates are closer to the start of their upward path than the end.  High inflation and rising interest rates are enemies of economic growth and financial assets.  Expectations are being recalibrated – downward.

Still, fundamentals remain generally strong.  Consumer and business balance sheets are solid, and there are almost two job openings for every one person seeking employment.  The U.S. economy is in position to absorb headwinds well, and this speaks favorably for the long term prospects for financial markets.

In the short term, as noted in our recent communications to you, returns will likely be subdued and volatility uncomfortably high.  Starting in late 2021, we adjusted portfolio models to incorporate lower risk profiles in anticipation of these times.  Portfolios under our responsibility are broadly diversified, conservatively structured, and managed with discipline and prudence.  They are designed to meet client-specific goals. 

To close, we want to emphasize the importance of communication – in good times and bad.  We want to make sure you understand the steps we take to manage wealth for you.  More important, we want to make sure we know your goals, your tolerance for risk, and your expectations of us.  Reach out to your Advisor for a review.  We’ll both better navigate the challenges – and opportunities – ahead.