The mood in the current stock market is one of resignation triggered by the Federal Reserve’s hawkish tone and suggestion that interest rate hikes are on the way to cool an overheating economy, investors will be looking for another gauge of inflation in the coming week.
The Federal Reserve raised interest rates for the first time in over four years in March after slashing them to near-zero at the start of the Covid-19 outbreak. The Fed plans to raise rates throughout 2022 and reduce its $9 trillion balance sheet to combat high inflation but there is a fear that the Fed will go too far and cause a recession.
The Federa is attempting to make a gentle landing for the US economy by tightening monetary policy to combat the highest inflation in nearly four decades while avoiding a recession.
Meanwhile, despite sporadic peace talks, Russia’s invasion of Ukraine continues, posing a threat to the European economy, American company investment, and consumer consumption. All of this adds up to volatile trading days and a tumultuous investing environment that’s likely to continue for the coming months.
Why the Current Stock Market Is Bad for Investors
The stock market’s recent performance indicates suggest that should be very cautious with stocks. Instead, this is an excellent time to raise cash, starting with liquidating the worst-performing names in your portfolio.
However, you should remain active in the market and begin developing a robust watchlist. Look for stocks that are contracting less than others or the major indexes, these will have relative strength lines that are rising.
1) Inflation Remains the Biggest Stumbling Block, But….
The impact of increasing prices on Americans is palpable: According to the latest Forbes Advisor-Ipsos Consumer Confidence Weekly Tracker, 65% of adults anticipate inflation will rise in the coming year. The rise in inflation is important for market players because excessive inflation can hurt both expenditure, which accounts for around two-thirds of GDP, and consumer sentiment. According to AXS Investments’ Chief Executive Officer, Greg Bassuk, investors should not discount inflation and rising prices if the Fed begins to make interest rate hikes.
While the Fed does not meet next until May, some market participants call for higher rate hikes, such as 50 basis points, rather than the 25 basis points seen in March. Traders feel that by the end of the year, the fed funds rate will be in the 2.50% to 2.75% target range, which would be the highest since 2008.
Saving for the long term can be challenging in the current environment when Americans are dealing with more significant inflation and rising interest rates. Recent market volatility, fueled by the Fed’s rate hikes and the conflict in Ukraine, may have alarmed some investors. However, experts advise that, if possible, investors continue to invest consistently, particularly for those with longer time horizons.
Investing in volatile markets is, of course, not without risk. Despite this, investors can take steps to safeguard and even improve their portfolios during market downturns. Investors must be aware of the necessary disciplines to help them navigate what is typically a more tumultuous period. Diversification and rebalancing are examples of this.
Even within equities, you may want to diversify into sectors that perform better in periods of rising inflation, such as energy, industrials, and real estate. Commodities and gold have historically performed well during periods of high inflation.
2) Is the Bond Market Telling Us Something?
The 2-year and 10-year Treasury rates have inverted for the first time since 2019, signaling the possibility of a recession. An inverted yield curve happens when shorter-term bond rates are higher than longer-term bond rates, and it can suggest an impending crisis. However, analysts caution that it is only one of many recession indicators.
In recent months, other concerns mainly took precedence over economic development, including geopolitical risks—specifically, Russia’s invasion of Ukraine—and the diminishing number of Covid-19 infections.
These forces are currently driving the stock market, and Corporate America’s stalling ambitions to bring staff back into offices en masse implies the pandemic isn’t yet over.
However, for the first time in a long time, market participants are expected to be “very laser-focused” on any news that provides more clarity about the economy’s future. Even before the critical yield curve inverted, some investors were speculating about a future recession, mainly because continuing rising inflation may put a damper on consumer spending.
The first of three estimates of GDP growth in the first quarter is planned for release on April 28.
Many investors will be thinking about the start of earnings season in the coming weeks. inflation, including its impact on profit margins and demand, is expected to be a prominent topic of discussion for corporate executives.
According to data compiled by FactSet, analysts currently expect S&P 500 companies to post earnings growth of 4.8% in the first quarter, which would be the lowest rate since late 2020.
3) Investing in the Weeks Ahead
In the weeks to come, investors can expect increased volatility. While wild price changes might provide chances for regular traders, especially when there are large declines in stock prices, they can also increase the anxiety of even the most consistent long-term investors.
Diversifying your portfolio beyond exchange listed stocks and bonds to alternative assets with a weaker correlation to these markets is one strategy to protect your portfolio from the effects of volatility.
The current investing environment is made more difficult by inflation. It depreciates the value of money that isn’t invested while rising interest rates reduce the value of existing bond allocations, and many stock market sectors have suffered losses this year.
A common theme is to be selective about the sectors of stocks to invest in. Aside from the stock market’s year-to-date decline, the likelihood of rising interest rates in the future could present an opportunity to buy stocks at a discount. Investors may wish to consider repositioning their portfolios in April to take advantage of the upcoming dynamics.
- Johnson & Johnson (NYSE: JNJ) has underperformed the market over the last two years, gaining only 30%. Nonetheless, by 2022, the company’s health has proven to be a source of wealth for its shareholders. Investors will be looking for more of the same after a dividend boost since it has easily outperformed during a market slump so far.
- American Airlines (NASDAQ: AAL) expects a pretax profit in the second quarter as strong reservations help it offset rising fuel prices. The airline is the latest to say that travel demand is outperforming expenses. Despite the fact that the airlines lost money in the March quarter due to Omicron-related issues impacting performance in the early part of the quarter, the carriers’ optimistic revenue forecasts for the June quarter, thanks to strong air-travel demand, were quite promising.
- People familiar with the matter said Twitter Inc (NYSE: TWTR) began talks with Elon Musk on Sunday after Musk wooed several of the social media company’s shareholders with financial specifics on his $4 billion purchase offer. According to the sources, the company’s decision to speak with Musk earlier on Sunday does not imply that it will accept his $54.20 per share offer. It does, however, imply that Twitter is currently looking at the possibility of selling the firm to Musk on favorable terms, according to the sources.
Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
Tim Thomas has no positions in the stocks, ETFs, cryptocurrencies, or commodities mentioned.
Featured image credit: Unsplash.
Tim Thomas was born in Guildford and now lives near Southampton, the UK with his family. Tim started his career in the financial markets and has traded and invested in stocks, options, forex, futures, crypto, and real estate for over 20 years. His website, https://timthomas.co/, is dedicated to teaching swing trading strategies for profits, helping traders reach their wealth and financial freedom goals.