Volatility is Opportunity
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.
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).
Inflation Pressures
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.
Corporate Earnings
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.
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