Transcript:
Are you feeling uncertain? I'd like to explore with you the recent market correction, what's driving it, and why it's at odds with many of the underlying economic trends.
The main takeaway for long-term investors is to not overreact to these short-term market movements.
There is a lot of uncertainty in the world right now. Between the geopolitical uncertainty, a changing interest rate regime, inflation, and continued consumer pessimism it remains imperative to have a financial plan which helps you make informed decisions about the risks you can afford and need to take.
Now is the time to stick to a well-crafted financial plan that can help you confidently work toward achieving your financial goals.
With that, let's dive in to three key insights on what's driving markets today.
First, the S&P 500 recently fell 10% from its peak earlier this year. Declines of 10% or more are often referred to as "market corrections." The stock market had previously made strong gains this year despite Fed rate hikes and rising interest rates.
One major contributor to both the ups and downs in the market is a group of stocks that is now referred to as the "Magnificent 7." These are tech stocks including Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta. They have gained 77% year-to-date, pushing major market indices higher.
However, they have also been a source of market volatility. Last year, when markets fell into bear market territory, this group declined almost 50%. Thus, their latest decline is also dragging the overall market lower.
For long-term investors, it's important to balance enthusiasm for technology stocks with overall portfolio diversification. What matters is not to focus on these stocks as standalone investments or trades, but in terms of how they fit inside a diversified portfolio. The last two years are evidence that the rewards of investing in these stocks also comes with important risks which can be balanced with a long time horizon and with investments in other sectors and asset classes.
Second, what may be odd about the market correction to some investors is that the economy is far stronger than most economists anticipated. The latest GDP report for the third quarter shows that the economy grew by 4.9% after adjusting for inflation. This is the strongest growth rate since 2021 during the post-pandemic surge. Before that, the economy hadn't grown this quickly since 2014, and before that, 2006.
It's important to remember that many investors expected a recession in 2023. Not only has this not occurred, these numbers show that the economy is quite strong. Inflation is also improving and the unemployment rate remains extremely low. While the economy could slow a bit from here, especially as the Fed keeps rates high, numerous underlying fundamentals continue to exceed expectations.
Finally, this chart shows that market corrections are not only normal, but occur on a regular basis in both good and bad years, and even in bull markets. The bars show the number of 10% corrections investors experienced each year, and the line shows the level of the S&P 500. It's clear that even in otherwise good times, market corrections can occur without notice.
For this reason, it's important to not lose focus of the big picture, especially when it comes to your financial plan. Markets will often swoon over the course of weeks and months, but this should not stop investors from staying invested over quarters and years.
I hope you found these insights helpful. As always, please reach out if you would like to discuss any of these topics further. I look forward to speaking with you.
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