The first month of 2022 was off to a bumpy start, with Wall Street experiencing a sell-off that resulted in the S&P 500’s greatest decline since March 2020. After ending 2021 in record high territory, the drop is certainly unwelcome but not entirely surprising. With inflation at the highest level in years, the Fed is focused on bringing rising prices under control by raising interest rates and trimming its balance sheet.
Expectations are that the Fed will make the first rate increase of the year at its March meeting. Geopolitical tensions are also adding to jitters in the market, as the prospect of Russia invading Ukraine remains a credible threat. On a more positive note, in mid-January the Conference Board released one forward-looking gauge of the economy, the Leading Economic Index, that showed a 0.8% rise in December. This supports expectations that the U.S. economy should anticipate steady, albeit somewhat slower, growth in the coming months. Also on a positive note, the Omicron variant of Covid has likely reached its peak in many countries, and the virus may be on its way to becoming endemic, and thus manageable.
Over the next month, as the market continues its gyrations, investors should be mindful of the fact that selloffs are normal, all part and parcel of investing. We know that the interest rate outlook is playing a significant role in the current selloff. Experience has shown that once the market adjusts to rate increases, stock prices stabilize. Maintaining discipline and a long-term outlook is the best way to ensure that you enjoy the long-term benefits of investing in equities.
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S&P 500 Index represents the 500 leading U.S. companies, approximately 80% of the total U.S. market capitalization.
MSCI EAFE Index is an equity index which captures large and mid cap representation across 21 Developed Markets countries around the world, excluding the US and Canada.