Pullbacks and Corrections
Volatility is a normal part of the market and you’re going to see pullbacks but it’s when those pullbacks occur that we think is important. We found some interesting data that shows since 1945 there have been a total of 61 pullbacks of 5% to 10% and 23 corrections of between 10% and 20% in the stock market. Of those pullbacks, the ones that started before the end of February, 100% of the time, the market ended up higher by the end of the year, fully recovering any losses. You never want to see the market down, but if it’s going to be down you want it to be early. The later in the year happens, the more costly it is to you. if the correction starts in June, you only have a 63% chance of recovery.
Last week we saw inflation hit the highest year-over-year spike in over 40 years. After being relatively stable around 2% for the past 25 years, inflation has erupted from virtually every corner of our economy with 7% being the number reported last week. Inflation continues to be one of biggest challenges to the economy, investors, and policymakers. Therefore, we continue to highlight it in our weekly conversations. We’ve had clients ask about the cause of this record inflation, so we wanted to share a chart that shows what exactly is contributing to the spike. You can see, on the right side of the chart shown in the video for this vlog, the light blue represents energy. Energy has more than doubled year-over-year. The light Gray at the bottom shows the increase in the cost of food, which, if you’ve been in the grocery store recently you’ve probably noticed your bill is higher. The black section represents the increase in costs of durable goods. Durable goods are cars, refrigerators, dishwashers, washer, dryers, and other big-ticket items. The orange section is rent and housing. Rent and housing has remained a big driver of our inflation over the past few years. The bottom line is that we could see inflation get worse before it gets better, as supply chain issues get worked out. The market will be greatly impacted by how aggressive The Federal Reserve deals with inflation and that is something we’re analyzing very carefully and a reason why we continue to talk about it on a weekly basis.
Goods vs. Services
Over the last few years, we’ve seen an explosion in demand for goods. Individual consumers have been spending a lot of money on goods and less on services such as the experiences like to go out to eat. Goods are very inflationary because they have a need to be shipped, to be sold at a store, and to be produced. We’ve seen expansion in services and that’s not nearly as inflationary because services can be multiplied and can be duplicated. Service inflation goes straight to increases in wages, which on a total economy, is still a positive. Ashley Page did a great educational vlog last week on the experience economy where he went into more detail regarding this topic and the details surrounding goods and services.
To begin the year, bond yields have skyrocketed compared to what they were. With them being at very low levels to begin with, it has some people worried about what’s in store for stock prices. It’s important to keep in mind that typically, bond yields only rise when the economy’s good. The chart shown in the vlog for this episode shows that for the last six times bond yields have increased, specifically the 10-year treasury, they have had a substantial gain that lasted. In relation to that, stock market performance has been rather remarkable, also shown on a chart in the video for this blog. Overall, the last six times bond yields went up, it’s been a gain and rather substantial.
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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Stock investing involves risk including potential loss of principal.
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