Roundup: What to do when Markets are Down

The 2022 stock market has been turbulent so far, and that doesn’t come as a shock. Between sky-high inflation and upcoming rate increases by the Federal Reserve, investors are facing a lot of uncertainty. 

Here’s a look back at some of my previous posts explaining what investors should look for, and how they can manage that uncertainty:

Dealing with inflation

Inflation is a major concern right now, as it affects not only investments, but your basic, everyday purchases, too.

There are a few reasons inflation is so high right now. The stimulus payments had a hand in it, because that meant more money pouring into the economy in response to the pandemic shutdowns. Then there was an increased demand for certain supplies, products and services, which drove up prices. We also experienced some major supply chain issues.

All of that leads to our current inflation situation, and the Fed planning to increase interest rates this year. As I wrote in this article, “We have taken a slightly more conservative approach with clients’ portfolios lately in case the markets start to drop. If that does happen, we will move more toward growth. It also might make sense to hold off on major purchases until the supply chain starts to move freely again. Prices are higher right now, and there are significant delays.”

A Looming Recession

Recessions are a fact of economic life. They’re part of a normal and expected cycle. Therefore, we can look back at the warning signs of previous recessions to see if we might be experiencing something similar.

In the early 80s, spending was up in America. This was due to stimulus money provided by the federal reserve to curtail recessions in the 70s. Inflation reached record highs, and the Fed had to raise interest rates to try to bring it down. Inflation went down quickly, but it took the economy with it. That led to the recession of 1981.

We are facing a similar situation right now, so it’s certainly not out of the question that a recession could be coming. It’s a gamble. The Fed doesn’t know how the economy will react to the interest rate hike.

As an investor, it’s a good idea to have a game plan together in case of a recession. Check up on your portfolio allocations, balance your investments where needed, and avoid knee-jerk reactions to market behavior.

Here are some other resources to help you manage investments in a recession:
How to Invest Your Way Through a Recession
Risk Tolerance: What it is, and why you should know yours
Why You Need Diversification

The Yield Curve

In the pre-pandemic days, we were watching a potential recession warning signal: the inverted yield curve. 

The yield curve plots bond interest rates by maturity on a graph. Those bonds are typically U.S. treasuries. What you normally see are yields with shorter dates that are less than yields with longer dates. A slope upward means investors expect growth to continue. 

An inverted yield curve, on the other hand, can mean that investors are less confident in long-term growth, and therefore investing less money into long-term projects. This may be a signal to the market that money could be freezing up.

The yield curve last inverted in 2019. A recession did follow, but that was the 2020 recession due to the pandemic. But this year, it is flattening and could invert by the end of the year.

So, what does that mean? Paired with the current inflation situation and the upcoming Fed rate hikes, it’s yet another indicator that we may be heading for a recession. We can’t predict exactly what will happen, but it’ll be something to watch as the year goes on.