Why Did the Stock Market Drop This Week and What to Do next?
We saw another tough week for the stock market. It’s times like these when alternative strategies shine and reinforce our view that every portfolio should include investments that are not closely correlated to the stock or bond markets.
On Wednesday this week, the Fed raised the Fed Funds rate another 0.75 percent to a whopping 3.25 percent. However, the market expected the rate-increase. So if the rate-change this week didn’t strike fear into equity traders’ hearts, what caused the market to drop? Drumroll please: The Fed’s projections of future rate increases. The Fed increased its projections from a range of 3.25 to 3.5 percent to about 4.4 percent by year-end and 4.6 percent in early 2023. The more aggressive forecast triggered fears of worse-than-expected economic struggles, and it signaled that high rates may stay longer than expected, which could negatively affect the economy possibly through 2025.
A bright spot is that there are two jobs currently available for every unemployed worker, but the Fed is seeking to stifle recent wage growth and increase the unemployment with this week’s rate hike. Analysts expect unemployment to rise from 3.7% to 3.8% by the end of the year and reach 4.4% by the end of 2023.
With these bleak forecasts in mind, should you move out of stocks? The answer depends on your individual situation, risk tolerance, and time horizon. The market is a leading indicator and has now absorbed the updated projections. Should the Fed be less aggressive than expected, we could see a significant uptick in equity performance. We expect continued volatility in the markets, which also presents buying opportunities. All in all, we are comfortable with our allocations and feel our portfolios are well positioned for the current environment. But we continue to monitor developments and implement changes as we deem necessary. Please do not hesitate to reach out if you would like to discuss your current portfolio allocation.