Keep Your Powder Dry, the Time To Shoot Is Coming

Question:

The market has lost about 25% this year, and my investment statements tell me a similar story. When will the bleeding end?

Answer: 

It probably feels like your portfolio sank, and now you’re drowning in a sea of bad economic news and falling stock prices. Bear markets aren’t fun, but they don’t have to be a disaster. With proper planning, you might be able to profit from the current market.

To understand how America gets out of the bear market, you need to understand how we got into it. When COVID-19 hit, both the federal government and the Federal Reserve (Fed) threw everything they could into the punch bowl to keep the economic party going and stave off a massive recession. Mission accomplished, but now America has a hangover.

Thanks to all that stimulus, the United States came out of COVID-19 with a relatively strong economy, and Americans were eager to buy things. However, the rest of the world wasn’t ready to supply those goods and services. More demand plus lower supply equals higher prices—aka inflation.

The Fed reacted strongly by having multiple 0.75% interest-rate increases (0.25% is a ‘normal’ increase, 0.50% is considered ‘strong’). The combination of higher interest rates, higher costs, and lower profits are a whammy on stock prices. Stock prices tend to fall when rates go up as the cost of capital becomes more expensive, and when earnings go down. When both happen at the same time? Well, you get 2022.

Now let’s talk about staying afloat in this tide of uncertainty. First, recognize that bear markets don’t last forever. Inflation will slow as the Fed raises interest rates, reducing demand, and new supplies and suppliers are created. Businesses will adapt to their conditions and earnings will start growing again. In other words, the conditions that are submerging your portfolio will reverse and it will start rising again. The tricky part is that the market does not wait for good news; it anticipates it. So, the market recovery will begin before the economic recovery.

If you want to keep swimming, work with your advisor. First, reaffirm that you have a plan to provide cash, or dry powder, while the bear market continues. Second, determine how much dry powder you want to reinvest when the situation improves. Remember, the waters will still be rough when it is time to start averaging back in. As we often say, investing takes courage.

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