The first quarter of this year has been losses for the stock market. As much as I try to be optimistic about the market and look out for good buying opportunities, I also try to explain certain actions in the market and investment strategies that are apt for its current state.
The S&P 500 has declined 4.6% for the quarter, while the Nasdaq composite plunged 9%. But there was a slight relief in March when the Federal Reserve raised interests rates for the first time in four years. But that relief was not enough to instil confidence in the markets and prevent the broad market selloffs that have looked unabated even down to April.
I believe that the topsy-turvy market environment causes this. Moreover, this uncertainty is felt not only in American markets but globally. For one, the Fed's hiking of interest rates was a relief. It has been slashing rates to near zero for the last four years. The Fed has also been moving to lower the record $9 trillion balance sheet to stem inflation pressures. But there is the fear that the Fed may go too far and bring about a recession.
Also, there has been geopolitical pressure from the war in Ukraine. Even while peace talks are going on, Russia continues to bombard Ukraine to weaken its resistance. This conflict has threatened the European economy and affects American business investments and consumer spending. So, you can see why the markets have been volatile since the beginning of the year and throughout the past weeks.
Uncertainty drives volatility, and until some clarity comes to the market, there will be continued volatility in the stock markets.
Can Inflation Be Tamed?
Investors cannot discount inflation. It erodes their buying power and their ability to make investments. Many investors are hoping for higher interest rate hikes, to the tune of about 2.75%, which would make it the highest since 2008. But when the Fed convenes in May, we will know their decision.
Meanwhile, the focus has shifted to two inflation reports that will come out this April. The first is the Consumer Price Index (CPI) on April 12, and the next will be the Personal Consumption Expenditures (PCE) price index on April 29. These two reports have the potential to increase or reduce the selloff pressure in the markets.
How Can Investors React?
There is much uncertainty right now. So expect the market selloffs to continue in the short term. Be prepared for more market volatility. However, this can create opportunities for people who are frequent traders, especially with anticipated big dips in stock prices. But, there will be heightened anxiety for even savvy and long-term investors.
Already, the bond market is signalling a recession. For example, the 2-year and 10-year treasury yields have inverted for the first time since 2019. An inverted curve is a predictor of recession, although other factors will have to be considered. Right now, I advise investors to buffer their portfolios at this time. One way to do this is to invest in stagflation proof stocks. If you've followed my past articles, I've done great analyses on quite a few. This current market state is a great time to buy stocks at a discount. You can take advantage of this opportunity.
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