A Brief Update: The Return of Market Volatility
For those who read our recent Business Journal article “Risk Doesn’t Sleep” – I really was not trying to bring on volatility with a discussion of risk, and I hope it’s reappearance is only temporary. However, we certainly do not believe the nature of the stock market as it relates to risk has changed. Returns over time do involve accepting some level of risk.
As we do not believe the nature of the stock market has changed, we also do not believe the nature of economic cycles has changed either. Over time, one does have a relationship to the other. They historically do not mirror each others rises and declines. The stock market is known as a leading economic indicator. Stocks generally try to anticipate the future of the economy and individual companies. Typically, as the economy heats up, fears of inflation can appear. This may cause the Federal Reserve to raise interest rates to tap the breaks on the economy. As interest rates are below historical norms some may want to have rates settle higher so that a recession can be combated by lowering rates from a number higher than present rates.
All this has historically played out as the ebbs and flows of our economy and markets. We know however, the pace of these events can be driven by human emotion exacerbating ups and downs. In the long run we do believe in the ability of financial markets to correctly price stocks and bonds, however in the short run markets can resemble moody teenagers. This fast-moving changeable aspect of the markets is the most maddening part of being an investor. It’s very easy for most of us to want to think we know how events are going to impact markets, especially with hindsight. It is true one might be able to guess when to jump in or out of an investment and be right, but more often than not we have found market timing to be detrimental to one’s finances.
Most investors as well as us, your advisors, are counting on the ability of the investment markets coupled with the level of risk we have chosen together to deliver the best chance of having your money provide for the goals in your life.
As always, please do not hesitate to call or email if you have questions or concerns you would like to discuss.