The first quarter of 2022 has been somewhat of a head scratcher for investors. With everything that has transpired like Covid and the Russian-Ukraine crisis many investors are asking “What’s going to happen next?” To answer that question, lets take a look at what has happened and what may happen next.
So, what happened in the First Quarter?
2022 began with a strong economic backdrop. The economy had low unemployment, low interest rates, strong consumers, and a fading COVID strain in Omicron that seemed highly infectious but had relatively mild severity. The stage was set for continued economic growth and strong markets, but instead, the markets began to experience volatility. A healthy correction began in January as investors focused on inflation, but the markets rebounded slightly into February before the Russian-Ukraine crisis took hold. As the crisis evolved, the correction deepened as the United States and its allies’ issued sanctions on Russia. Oil spiked to near $130/barrel at one point, the Federal Reserve raised interest rates for the first time in several years, and fears about a third World War rattled the markets. Though, by mid-March the markets began staging a rebound as the situation improved. The markets are poised to have their first negative quarter since the beginning of 2020 with the S&P 500 and Dow off by about 4% each, and the NASDAQ down 8%.
Where are the markets going from here?
It is an impossible task to try and time the markets or make predictions about which way they will go. Instead, its important for investors to understand the reasons why they might go up and reasons they might go down, and plan for both.
First, lets look at why the markets may be troubled the rest of the year. It is easy to assume that the Russian-Ukraine crisis will direct the markets, but that is only one piece of a more complex issue: inflation. Inflation is the rising cost of goods and services in the economy. It is made up of many different items such as energy prices, food prices, housing prices, automobile prices and more. As many Americans noticed, the prices of a lot of those goods seems to have risen over the past two years because businesses tend to pass on the price increases they experience to consumers. Currently, the main concern in the economy is that consumers will begin to purchase less goods because prices are too high, which will then lead to slowing economy. If the economy slows too much, the markets could experience more volatility.
Next, we can look at why the markets could improve. Even though inflation is high, the US economy came into this situation on extremely good fundamentals. Consumers across the US were spending money. The federal response from Covid, politics aside, was a positive for consumers. Stimulus checks, the payroll protection program, and other measures meant that individuals had cash to spend once the economy opened back up. It kept many from taking on too much debt that could have become crippling. Additionally, stock market returns over the past several years have been positive, increasing the wealth of households across America. Finally, many Americans are seeing wage increases and bonuses from their current employers or finding new jobs easily. Even though inflation has been high, consumers seem prepared and willing to weather the storm. If so, economic growth will remain, and the markets could go higher.
As an investor, what should you do?
If you have a financial plan, stick to it. Financial plans are built to weather good and bad markets. If the market retreats a bit, view it as a buying opportunity. If the markets improve, then that is a good thing. If you are someone who doesn’t have an established plan, or has questions about their current one, contact your advisor for a more in-depth discussion about your unique situation.