We knew that markets would likely continue their wild ride, and here we are. Stocks slid into bear market territory after a bad May inflation report showed that prices rose at the fastest pace since 1981.1 It is clear that the Federal Reserve's efforts to cool inflation haven't yet borne fruit, and investors are understandably nervous. In response to the public's concerns about inflation, the Fed raised the benchmark interest rate by another 0.75 points, the most aggressive rate hike in nearly three decades.2 Their move will hopefully yield relief from rising prices, but it also means that the cost of borrowing will go up, which could put a dent in business and consumer spending.
Should I be worried about markets?
Cautious, yes. Wary, perhaps. Afraid or worried? No.
- Many of the stocks leading the fall were high flyers during the pandemic, so the pullback could be a healthy correction of overblown prices.3
- Bear markets don't last forever. On average, they tend to linger for roughly 15 months. However, the 2020 bear market only lasted 33 days.4
- Half of the market's best days have happened during a bear market, so you can look forward to some good days ahead.5
To give you some historical perspective here’s what happened during the last few bear markets:
Looking at the chart, you can see that in a couple of cases, the markets bounced back within months. However, the 2008 bear market was a sustained pullback that lasted significantly longer. Is history always an accurate predictor of the future? Definitely not. But we can look to it for hints about what may come.
What happens next?
Markets will probably continue to be extremely volatile over the next weeks and months as investors digest the Fed's aggressive rate hikes, as well as concerns about an economic slowdown. The latest estimates still don't point to a recession in 2022, but that could change.6 On the other hand, the next rounds of inflation data might show that prices are cooling off, which could give the Fed breathing room and avoid more aggressive hikes later. We'll just have to wait and see.
What should I do now?
First of all, don't panic. The absolute worst thing you can do right now is to hit the eject button and bail on your investment plan. It is impossible to perfectly time reentry into markets and missing the ride back up could have a painful impact on your returns. Market downturns can also create opportunities for selective bargain hunting if you stay flexible.
The bottom line is this: markets like these are natural and expected. We've been expecting wild market behavior and we're in the thick of it. If you feel the need to sell or make drastic changes reach out to a trusted financial advisor. They will help you remain calm and make the best decision for your specific situation.