Considering the recent market volatility, we wanted to provide our thoughts on the current market environment and what we see as important for the months ahead.
The interest rate hiking cycle is causing the re-pricing of risk assets. As the cost of capital rises, those dependent on capital infusions to fund growth will continue to suffer the most.
That said, the consumer is healthy until they aren’t. Nearly 60% of the economy is consumer spending. As the labor market softens while the Fed battles inflation, so will spending habits. Cheaper substitutes will be sought out first, then wallets close.
The interest rate pendulum (along with the rest of the market) will most likely swing too far to one side. Leading us to a rate environment that will restrict economic growth as opposed to the accommodative regime we’ve had since March 2020.
The good news, this is a typical end to the business cycle without a cataclysmic event (e.g., global pandemic, sovereign debt contagion, housing crisis, etc.). The movement in asset classes, while painful for some, is not surprising. Sticking to your plan and not being overexposed continues to work.
The silver lining: equity markets are a leading economic indicator and as such act as a discounting mechanism. This means assets are already being repriced for the future expectations of our economy. Markets typically reach bottoms when the news out of the media seems the worst.
In times like this, we always recommend staying calm during a choppy stock market. The best returns always follow the worst drops and staying disciplined is the best course of action. Remember the key to investing is time in the market, not timing the market!