Last week was a tumultuous one for all the financial markets, including bonds, currencies, commodities, as well as the stock market. After another big down week, the S&P 500 is currently sitting at the lows of June. Although the stock market was down significantly, the other financial markets made much larger moves.
The most recent volatility started with the 0.75% rate increase and aggressive talk of the FOMC on Wednesday. What really added fuel to the flames was the FOMC’s forecast that the ending point of these rate increases (the terminal rate) will be significantly higher than previously forecasted. This was a lot of new information for the global markets to take in at once and it sent all financial markets into a panic.
The last 12 months have seen the type of stock market volatility that wears down and discourages many investors. This risk is also the reason long-term average stock market returns are significantly higher than less volatile investments such as bonds. This is called the risk premium and it means that investors comfortable with higher risks should benefit with the possibility of higher rewards.
There is currently a high risk premium and this buying opportunity to invest excess cash while the market is down doesn’t happen very often. The S&P 500 is currently down 24% and a drop of this magnitude has only occurred 11 times since 1942. The stock market can still go lower from here or stay at low levels for longer than expected, which is why they call it a risk premium. To mitigate these risks an investor should have a multiyear time horizon and invest at multiple price levels spread out over weeks or months, both part of our investment strategy.
There is so much more to discuss about market cycles and historical bear markets to offer some perspective on our current events. I will be diving into greater detail in the upcoming October newsletter, which will be sent on Friday.
Photograph by: Grahame Jenkins on Unsplash
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