For some investors, it may feel as if the market can’t catch a break. After what has already been a difficult start to the year, last week’s GDP report confirmed that economic growth slowed for the first time since the pandemic began. Along with higher interest rates and increased tightening by the Fed, this news drove the S&P 500 back into correction territory (a drop of 10% or more) and the Nasdaq into a bear market (down over 20% since its peak).
We know it can be challenging to remember the positive long-term trends in the face of short-term market negativity. Under the seemingly menacing surface, however, there are encouraging signs.
• Consumer spending grew 2.7% even after adjusting for inflation
• While economic growth slowed compared to the previous quarter, it rose by 4.3% compared to the prior year
• The job market is exceptionally strong with unemployment at only 3.6% and wages for hourly workers rising by 6.7%
Still, the negative headlines in the news have naturally raised concerns over a possible recession. As the chart below illustrates, recessions and bear markets are natural parts of the economic and market cycles, but while bull markets tend to be long, lasting several years if not a decade or more, bear markets tend to be much shorter. Investors should hold diversified portfolios that can withstand these periods rather than treat them as special cases.
For long-term investors, what matters is not that the economy is always perfect, but rather that overall growth will support corporate earnings and thus market returns. Companies are still doing well despite high inflation and other sources of uncertainty; over the course of full business cycles, it is profitability that propels stocks and portfolios forward.
While every market pullback is challenging and each new situation feels unique, the reality is that we’ve been here before and we have seen that diversified portfolios tend to stabilize and recover regardless of the underlying causes. We design all of our clients’ portfolios with this in mind. We believe that remaining calm through these market waves and resisting the urge to overreact to the headlines is the best way for you to achieve your financial goals. Please always feel free to reach out with any questions.
Sincerely,
Your Meritas Team