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Dan Nastou, CFA
 
 
It’s been a crazy year for financial markets, and it’s far from over…
 
Despite a two-day rally early this week, all three all three major stock indices sit near their lows for the year. Currently, the S&P 500 is down 24% for the year, the Dow is down 19%, and the Nasdaq is down a whopping 32%.
 
And if you adjust for the fact that inflation has eroded the value of the dollar by roughly 9% over the past year, these declines are actually even worse in terms of real value. In fact, after adjusting for inflation, the S&P 500 is now back to pre-pandemic levels. This may seem hard to believe, but since January 2020, total inflation has been about 15%, and the S&P 500 now sits roughly 15% higher than it did at that time (representing no real gain in value).
 
Bonds have also struggled this year. Traditionally, investors have looked to bonds for portfolio stability. But the classic 60/40 stock/bond portfolio has had a bruising year too, down roughly 20% year-to-date (again, worse if you adjust for inflation). Incidentally, this is about how it performed in 2008, the year of the Global Financial Crisis. Ugly performance to say the least.
 
In short, not much has been safe as the Fed continues to raise rates to combat the highest inflation we’ve seen in forty years. I recently wrote about the link between inflation, the Fed, and the stock market, so check it out if you haven’t yet. Basically, as the Fed moves to more restrictive monetary policy (ie “tightens”), asset valuations have fallen, and in fairly dramatic fashion.
 

So what does this mean for our finances?

Well for one, you might actually be able to get a decent rate on your savings account these days. Now that short-term interest rates are above zero, it’s worth reaching out to your bank to see what kind of rate they currently offer (or consider shopping around for better if they won’t budge). A number of online only savings accounts are currently paying north of 2%. 
 
In terms of markets and investing, as always I would encourage having a long-term mindset. Trying to time the ups and downs of the market is virtually impossible. And if you’re young (or relatively young), employed, and regularly saving money, what’s happening now in the markets has the potential to eventually be a good thing, despite the obvious near-term pain.
 
That’s because higher interest rates/lower asset valuations today means more room for future gains. Effectively you’ll be “buying the dip” with your future 401(k), IRA, 403(b) contributions. Which means the money you invest going forward should have the potential to generate higher returns than it did with rock bottom interest rates and high valuations (assuming it’s wisely invested).
 
But that doesn’t mean we’ll necessarily see a rapid rebound in stocks, bonds, and other assets like we did after the 2020 crash. Since 2008, financial markets have enjoyed a period of historically low interest rates and rising valuations. But now, that at least appears to be ending. The Fed funds rate is the highest it’s been since 2008, and the same is true for Treasury bond yields and 30-year mortgage rates. In other words, financial market conditions going forward may be quite different from what we’ve experienced over the last decade of “easy money”. And there may be some more pain in store as those adjustments continue to take place and impact asset valuations. 
 
Eventually though, this should help pave the way for future growth and gains. So stick to your long-term plan and avoid making rash, emotional decisions based on what the markets are doing on any given day. Building wealth takes time, and corrections, while painful, also create opportunity. So keep grinding, keep saving, and keep investing. It will pay off. 
 
That’s it for now.
 
Best,

Dan
 
 
This content is intended for educational purposes and should not be taken as specific investment advice. Please talk to your financial professional if you need help or are thinking about making changes to your investments.