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The stock market has been on a tumultuous roller coaster since the 2/24 invasion of Ukraine. After hitting an all-time high in early January, the broad market took a sharp turn downward. The S&P 500 sold off from 4796 to 3666, losing around 23% of its value. This sent shockwaves through the financial world leaving many investors in all equity portfolios in doubt and despair. 

In Q2, the S&P 500 cratered 16.4%, its second-worst quarter in a decade, with media psychics predicting the bear market was just waking up from hibernation. As expected, many investors were caught off guard when the stock market began to rebound in mid-June.

Since June 16th, the stock market has been in a recovery mode. The S&P 500 has rallied 8% from its lows and it has been holding.

Market Price Rediscovery

Stock prices are determined by supply and demand. Stock values will go down when more investors sell than buy, and conversely, prices will go up when more investors buy equities than sell them. News events or analyst recommendations can also influence prices, but at the end of the day, it’s about supply and demand.

In mid-June, market prices stopped falling as investor sentiment became even direr. Then, stocks unexpectedly/expectedly reversed the trend and slowly started to rise. This about-face was driven by various factors: the first wave of selling from margin call liquidations was absorbed, the Fed escalated interest rate tightening and alerted market participants, and the excess supply of selling from individual investors pulling their money out of the market was nearing exhaustion, at which time the market’s value summoned an increase in appetite/demand from institutional investors.

As institutional investors started to buy up shares, they provided much-needed support for stocks. Many risk-adverse individual investors had moved their money into cash. This decrease in selling pressure allowed prices to start recovering. Unfortunately, investment-grade bonds that are considered buffers to stock market bear markets have suffered their deepest losses in four decades, adding to retail clients’ misery.

What does this mean for investors?

The current market rebound is a reminder that it’s important to maintain a well-diversified portfolio. While no one can predict the future, history has shown us that markets go through cycles of ups and downs. Holding a mix of asset classes can smooth out the bumps to help weather market volatility. Periods of high market stress are a stark reminder of the importance of having an investment allocation that incorporates short-term, intermediate-term, and long-term strategies. Selling after prices have fallen can lock in your losses and make it difficult to recover when the market turns around.

You’re not alone if you’re feeling overwhelmed by the market’s recent gyrations. Many investors wonder if now is the right time to get back in or if this is just a temporary respite before the bear market returns with a vengeance. While it’s impossible to know for certain what the future holds, we believe there are reasons to be cautiously optimistic that the worst might be behind us.

Stock prices typically fall during periods of accelerated inflation and economic turmoil as investors seek to minimize their losses.

The stock market has defied this trend recently, with stock prices counteracting the impact of double-digit percent rises in gas, food, and shelter costs. Financial markets are more efficient than ever in pricing known news, thanks to technological advances that allow information to flow more quickly and accurately. And, central banks worldwide are now resolute and cohesive in their mission to contain and curtail costs even if their action triggers a recession.

What causes a recession?

A recession is typically defined as two consecutive quarters of negative economic growth. However, several different factors can contribute to a recession. One common cause is a decrease in consumer spending. When consumers cut back on spending, businesses are less likely to invest in new products or expand their operations. This can lead to layoffs and a decrease in overall economic activity. Another possible cause of a recession is an increase in interest rates. If borrowing costs go up, businesses and consumers may reduce spending to save money. Finally, a recession can also be caused by problems in the housing market. If home prices fall and foreclosures increase, this can decrease consumer confidence and spending, further exacerbating the problem. While recessions can be difficult to predict, understanding the underlying causes can help to minimize their impact.

The silver lining 

Whatever the causation, the stock market’s recent performance has confounded many experts and provides a reminder of its resilience in the face of adversity. Fundamentals follow, they don’t lead the stock market. The economy should act accordingly once the stock market bottoms. The market is down, but it is not out. There are still ample opportunities for investors to make money. Plenty of companies are doing well; it may just take a little more patience and discipline to find them.

William Corley

Professional Money Manager – Private Clients

Disclosure : any views, thoughts, and opinions pertaining to the subject matter presented in this post are solely the author’s subjective opinions, and do not reflect the official policy or position of 1st Discount Brokerage, Inc. Information is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Past performance is no guarantee of future results. Any examples, outcomes, or assumptions expressed within this article are only hypothetical illustrations and should not be utilized in real-world analytic products as they are based only on very limited and dated open source information. Dollar-cost averaging, diversification, and rebalancing strategies do not assure a profit or protect against losses in declining markets. Asset allocation and investment losses. Assumptions made within the analysis are not reflective of 1st Discount Brokerage, Inc. nor its personnel.

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