Market Volatility and Inflation Concerns
Market Volatility and Inflation Concerns -“Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the risker the security.” (Investopedia.com)-
If you just recently opened an account with us or updated your Suitability Statement with one of our advisors, you may remember discussing ‘Investment Objectives’ and ‘Risk Tolerance’. These terms refer to your propensity to digest portfolio volatility (i.e., the daily ups and downs of your account balance). Simply put, as advisors, we want to know the level of risk you are willing to take in order to achieve your stated Investment Objective. We use that information to select the appropriate mix of securities for your portfolio. As you may have noticed, the overall volatility in the market has increased significantly over the last 15 months. From our perspective as your advisors, market volatility only matters in the short-term. In some cases, however, depending on the catalysts, it can lead to some longer-term side effects.
The introduction and immediate popularity of Cryptocurrency has certainly had an effect on market volatility. The cumulative value of all cryptocurrencies is well over $1 trillion. To put it in perspective, the market capitalization of the entire US markets is approximately $50 trillion. That said, if $1 trillion were to exit US markets in one day, the results could be significant.
In addition, $0-commision trading platforms have given life to a new generation of market participants, also called ‘retail investors’. According to businessinsider.com, nearly 25% of the previously noted $50 trillion US market cap is now controlled by retail investors. As a general rule, retail investors are more likely to enter and exit positions more frequently than institutional investors. The result? You guessed it – market volatility.
The primary driver of the market volatility, however, is simply the residual impact of COVID-19. When COVID-19 hit the US economy in mid-February 2020, the market lost a third of its value in just five weeks - down to levels we had not seen since late 2016. Such a drastic hit introduced significant volatility to even the most conservative of portfolios. With federal ‘help’ (PPP loans, stimulus payments, extended/increased unemployment payments, etc.), the market bounced back in record time, eclipsing previous market highs, less than 9 months later.
The benefits provided by such an astounding recovery, however, were relatively short-lived. The ‘free money’ flowing out of Washington DC has resulted in the devaluation of the US dollar. This is called ‘inflation’ - as the money supply increases, the value of each individual dollar is diminished. The Fed has implemented loose monetary policies (like keeping interest rates low) to control the rise of inflation but, unless the spending decreases, inflation is unavoidable. Inflation does not just affect the individual – it also effects corporations. Inflation fears may cause investors to buy or sell positions in expectation of a certain outcome. The result? You guessed it – market volatility.
It is important to remember, though, that market volatility is a short-term issue. The best defense against short-term issues is a well-diversified portfolio with a ‘buy and hold’ investment strategy. If you have questions about market volatility and your portfolio, please do not hesitate to contact us. We would love the opportunity to review your portfolio with you and address any concerns you might have.