It’s no mystery that stocks have run into turbulence in early 2022, and while this does happen to coincide with a return to normal for most people, there are other factors at play.
Of course, it’s true that many of the largest tech companies, including many household names, fared particularly well through much of the pandemic.
Changes to day-to-day life were truly extraordinary, and some companies in particular saw their customer bases swell as a result (like Zoom, Peloton, and Netflix).
Two years ago, would you have guessed that Grandma and Grandpa would become avid Zoom users?
Me neither.
And while changes such as remote work are clearly here to stay to some degree, others, such as the market for $3,000 stationary bikes, may be facing an (unintended) uphill battle.
So why are things changing now?
As we get to the tail end of the pandemic, high levels of government stimulus which were required to stabilize the economy during the onset of COVID-19 are no longer needed.
This is evidenced by the unemployment rate returning to a very low level (3.8% in February 2022 vs. 14.7% in April 2020).
Also, inflation has risen to its highest level in 40 years (7.5%), putting it squarely in problem territory, which requires not just stopping new stimulus, but reversing it by slowing the economy.
That’s because when inflation gets high, it tends to remain high as businesses raise prices and workers expect wage increases in the hopes of staying stay ahead of inflation.
How does the government remove and/or reverse stimulus?
The Federal Reserve combats problem levels of inflation by raising interest rates.
When interest rates rise, businesses take out fewer loans to expand their operations, while consumers purchase fewer (or smaller) homes or other large items than they might have before.
So when the growth prospects of the economy are less certain, this favors stocks with high levels of current profitability, rather than those who grow so quickly that it comes at the expense of profitability.
Have you noticed that on some days when unexpectedly positive economic data was released that the stock market was down? That’s because good news means that it’s time for stimulus to end.
The Federal Reserve is expected to raise interest rates at its next scheduled meeting (3/15), so it’s a good time to consider if your investment strategy could use some fine tuning.
If you’ve got questions, pick a time here.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.