Three major U.S. indexes plunged again on Thursday as investors got tripped by a hawkish Federal Reserve’s fight against inflation amid fears of a hard-landing.
As confidence got pummeled as well, financial experts recommended that investors not panic, but think about long-term strategies instead.
The Dow Jones Industrial Average
Nasdaq Composite index
and S&P 500
suffered their worst start to a year in the first four months of 2022 in over 80 years. On Friday, they plunged into the red, after Thursday’s trading erased all of Wednesday’s post-Fed rally.
The Federal Reserve on Wednesday hiked the benchmark interest rate by 50 basis points. Fed chair Jerome Powell said the central bank was not likely to hike its benchmark interest rate by 75 basis points at its next meeting, all but promising consecutive 50 basis rate hikes.
“Investors have a ton to chew on, so while we may see some short-term volatility, keep in mind it’s natural to see ebbs and flows in the market as we enter a new era of monetary policy,” according to Mike Loewengart, managing director of investment strategy at E-Trade.
Of course, some rattled retail investors could have already said that’s where things have been heading.
Almost 44% of people say the market is moving in a bearish direction, according to a recent sentiment gauge from the American Association of Individual Investors. That’s almost 14 percentage points above the 30.5% historical average on bearish sentiment in the ongoing tracker.
On the other hand, nearly 19% said they were bullish in the week ending April 20. That’s up from a 15.8% read one week earlier. But it’s been May 2016 since bullish feeling in the ongoing tracker hasn’t surpassed 20% for two straight weeks.
Meanwhile, six in 10 investors anticipate an increase in market volatility and seven in 10 say they worry about a recession, according to a recent poll Nationwide.
In the same poll, roughly four in 10 investors (44%) said they felt more confident in their ability to protect their finances in any upcoming downturn and 38% said they felt confident in their ability to invest in the stock market.
Regular investors who are newer to the markets — and maybe started during the pandemic — might not have the same resources or risk tolerance to keep their stomach during shaky moments versus more sophisticated investors, or institutional investors.
First off, there’s the short-term story.
“While sustained inflation and a more aggressive Fed is a risk to the economy and financial markets, a recession in the next 12 months is not in our base case,” wrote Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management.
“‘It’s time to make tweaks to your portfolio. You should not make wholesale changes.'”
— Scott Bishop, executive director of wealth solutions at Avidian Wealth Solutions in Houston, Texas.
The economy can grow even with the series of rate hikes, Marcelli said in a note.
Besides, there’s the long-term story to remember. Think big and think about the long game on investing during downturns and bouts of volatility, said Scott Bishop, executive director of wealth solutions at Avidian Wealth Solutions, based in Houston, Texas.
The downbeat retail investor mood expressed in the surveys and sentiment trackers match what he’s hearing from his clients right now.
Still, Bishop says if people feel it’s time to adjust strategies or cut loses, “It’s time to make tweaks to your portfolio. You should not make wholesale changes.” For example, that means it could be a time to reconsider allocations, take loses for tax loss harvesting. “If you invest your portfolio based on headlines, you will always lose,” he said.
The pandemic feels like it’s stretched much longer, but it’s only been around two years since the COVID-19 market bottom. Then there’s the second part of story for people who stuck the market instead of cashing out.
At a time like this, it’s definitely worth remembering the next chapter in that story, Bishop said. Ultimately, the people who experience the most financial pain are those that “take extreme action , binary action, I’m in or I’m out.”