Volatility is Opportunity
US stocks managed to finish in positive territory for the first time in four weeks. At this inflection point, it is worth reflecting on whether you saw opportunity or fear in recent declines.
It was a volatile week for stocks, but they seemed to have found a bottom, at least for now, thanks to a Friday rally. At these inflection points, it is always worth a bit of reflection. As an investor, were you content the past few weeks knowing that market volatility is normal, or did you feel unsettled about what each day will bring?
One thing we know for sure about the future is that it is unknowable. It is okay to be unsettled about what the future may bring, but it is important not to let those concerns drive investment decisions. Even if one were to somehow know with certainty that some event would happen in the future, that might not be enough to know how investment assets will respond. For example, had we known that the world would be engulfed in a pandemic for multiple years and that large portions of the US economy would be shut down for extended periods of time, most would have predicted disaster for equities. As we know from the past two years, the opposite was true.
The point is that you do not need to be a fortune teller to be a successful investor. A successful investor sees the past few weeks as normal volatility and sees the opportunity in such moves. What opportunities?
- The opportunity to purchase attractive assets at a lower price,
- The opportunity to potentially sell some securities at a loss to reduce your tax bill, and
- The opportunity to rebalance from higher-performing assets in your portfolio to lower ones (sell high, buy low).
So the next time that unsettled feeling begins to take hold, remember that volatility is normal, and volatility is opportunity.
Headlines This Week
US stocks managed to finish the week flat after several failed attempts to rally. The Fed provided some additional commentary, we received a new data point on inflation, and earnings season continues.
A Hawkish Fed
The Fed put out its monthly Federal Open Markets Committee statement on Wednesday, providing additional insight into their thoughts on liftoff (rate increases).
- The statement appears to set the stage for a March rate increase.
- Comments about the strength of the economy, high inflation, and a tight labor market open the door for a potentially aggressive tightening path.
- Chairman Powell did not push back against the idea of a 50 bps rate hike or a hike every meeting (typically, rate hikes have been in 25 bp increments).
On Friday, PCE inflation was reported, giving us more insight into the pace of price increases.
- Core year-on-year inflation was up 4.9% compared to 4.8% expectations and last month’s 4.7% figure.
- The report also provided insight into wage pressures which were weaker than expected.
- There is some expectation that this could be marking the peak point on these inflation measures.
Ultimately stock valuations are driven by the ability of companies to make a profit and grow their earnings. This week we had a big earnings release from Apple (AAPL).
- A third of companies have reported thus far, with most still surprising to the upside.
- The big one this week was Apple. Unlike Netflix (NFLX), which we highlighted last week as disappointing, Apple beat expectations and had encouraging guidance.
- The company produced record revenue despite some supply constraints and stated that it expected supply constraints to improve in the first quarter. That has positive implications for many companies.
The Week Ahead
The Bank of England (BoE) will meet next Thursday and is widely expected to raise its central rate again.
- After the bank’s first interest rate increase in December to 0.25%, the central bank is expected to increase rates by another 0.25%, bringing the country’s rate to 0.5%.
- The bank is being pressured to tighten its monetary policy as inflation is at record levels while the labor market is strong.
- Policymakers had previously indicated that once the bank rate reaches 0.5%, the bank would also start to shrink its balance sheet, which could start to drain liquidity out of the market.
Staying the Course
The European Central Bank (ECB) will meet Thursday and is expected to stick to the recent trend of not signaling any changes.
- The European economy has been sluggish as the labor market is still far from unemployment which has helped keep inflation in check.
- If inflation keeps rising to levels seen in the US and UK, the ECB might be forced to step in and start raising rates.
The headline for American economic data will be the nonfarm payrolls number on Friday, amongst other releases that will garner some attention.
- The last two jobs reports of 2021 indicated slower than expected jobs growth as the economy added 199k and 249k jobs in December and November, respectively.
- Consensus estimates are that the US economy added 238k jobs in January, with unemployment staying at 3.9%.
- Other numbers that could give an even clearer state of things are wage growth, labor force participation rate, and the unemployment rate, all out on Friday.
For those checking in on company earnings, next week will continue with the biggest names reporting.
- The rest of the tech giants will report, including Alphabet (GOOG) on Tuesday, Facebook/Meta (FB) on Wednesday, and Amazon (AMZN) on Thursday.
- Some other names to look out for next week include Exxon Mobile (XOM), Alibaba (BABA), UPS, Royal Dutch Shell (RDS), General Motors (GM), and Ford (F).
Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $1.8 billion.Overview
Strategic Financial Services, Inc. is a SEC-registered investment advisor. The term “registered” does not imply a certain level of skill or training. “Registered” means the company has filed the necessary documentation to maintain registration as an investment advisor with the Securities and Exchange Commission.
The information contained on this site is for informational purposes and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. Every client situation is different. Strategic manages customized portfolios that seek to properly reflect the particular risk and return objectives of each individual client. The discussion of any investments is for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments identified and described do not represent all of the investments purchased or sold for client accounts. Any representative investments discussed were selected based on a number of factors including recent company news or earnings release. The reader should not assume that an investment identified was or will be profitable. All investments contain risk and may lose value. There is no assurance that any investments identified will remain in client accounts at the time you receive this document.
Some of the material presented is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Strategic Financial Services believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
No content on this website is intended to provide tax or legal advice. You are advised to seek advice on these matters from separately retained professionals.
All index returns, unless otherwise noted, are presented as price returns and have been obtained from Bloomberg. Indices are unmanaged and cannot be purchased directly by investors.