“It’s natural to see ebbs and flows in the market as we enter a new era of monetary policy”: As stocks fall, savvy investors calmly focus on the long game

Three major US indices tumbled again on Thursday as investors took a hit from the Federal Reserve’s hard-line fight against inflation amid fears of a hard landing.

As confidence was also affected, financial experts recommended that investors not panic but think about long-term strategies.

The Dow Jones Industrial Average DJIA,
Nasdaq COMP Composite Index,
and S&P 500 SPX,
suffered its worst start to the year in the first four months of 2022 in more than 80 years. On Friday, they fell into the red, after Thursday’s trading wiped out all of Wednesday’s post-Fed rally.

The Federal Reserve raised the benchmark interest rate by 50 basis points on Wednesday. Fed Chairman Jerome Powell said the central bank was unlikely to raise its benchmark interest rate by 75 basis points at its next meeting, promising back-to-back rate hikes of 50 basis points.

“Investors have a lot to chew on, so while we may see some near-term volatility, keep in mind that it’s natural to see ebbs and flows in the market as we enter a new era of monetary policy,” according to Mike Loewenart, manager. director of investment strategy at E-Trade.

Of course, some nervous retail investors might have already said where things have headed.

Nearly 44% of people say the market is moving in a bearish direction, according to a recent sentiment gauge from the American Association of Individual Investors. That’s almost 14 percentage points above the 30.5% historical average in bearish sentiment on the current tracker.

On the other hand, nearly 19% said they were bullish in the week ending April 20. That’s more than the 15.8% read a week earlier. But it has been May 2016 since bullish sentiment on the current tracker hasn’t broken above 20% for two weeks in a row.

Meanwhile, six in 10 investors anticipate increased market volatility and seven in 10 say they are worried about a recession, according to a recent Nationwide survey.

In the same survey, about four in 10 investors (44%) said they felt more confident in their ability to protect their finances in any coming downturn, and 38% said they felt more confident in their ability to invest in the stock market.

Regular investors who are newer to the markets, and perhaps started during the pandemic, may not have the same resources or risk tolerance to keep their stomachs down in times of instability compared to more sophisticated investors or institutional investors.

This is where it’s important to take a breather and avoid doing anything drastic, experts say, especially with talk of the recession continuing.

First, there is the short-term story.

“While sustained inflation and a more aggressive Federal Reserve are risks to the economy and financial markets, a recession in the next 12 months is not in our base case,” wrote Solita Marcelli, Americas chief investment officer at UBS. Global WealthManagement.

‘It’s time to make adjustments to your portfolio. You should not make wholesale changes.

— Scott Bishop, CEO of Wealth Solutions at Avidian Wealth Solutions in Houston, Texas.

The economy can grow even with the series of rate hikes, Marcelli said in a note.

Also, remember long-term history. Think big and think long-term investing during downturns and bouts of volatility, said Scott Bishop, executive director of wealth solutions at Avidian Wealth Solutions, based in Houston, Texas.

The bearish mood of retail investors expressed in surveys and sentiment trackers matches what you’re hearing from your clients right now.

Still, Bishop says that if people feel like it’s time to adjust strategies or cut losses, “it’s time to make adjustments to your portfolio. You shouldn’t make wholesale changes.” For example, that means it might be time to reconsider allocations, take losses for tax loss harvesting. “If you invest your portfolio based on the headlines, you will always lose,” he said.

It seems that the pandemic has spread much further, but it has only been about two years since the COVID-19 market bottomed out. Then there is the second part of the story for the people who stayed in the market instead of getting paid.

At a time like this, the next chapter in that story is definitely worth remembering, Bishop said. Ultimately, the people who experience the most financial pain are those who “take extreme measures, binary actions, I’m in or I’m out.”

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