What’s Happening with the Markets, and Why

Recent downturns in the stock market appear to be signaling the possibility we are heading towards a “correction,” as all major equity indices (DJI, S&P, Nasdaq) have recently taken hits. At the same time, inflation has increased. Unlike the global financial collapse of 2008-2009, the potentiality of an upcoming downturn should be anything but surprising. Additionally, and in direct relation, inflation rates have reached highs not seen in more than 40 years. So…why the market volatility, and skyrocketing inflation, and what are the contributing factors?

Based on history, a stock market correction is long overdue. Since the 08’-09’ collapse, we have experienced one of the longest bull runs (positive annual returns) in market history. Various analysts have wondered if the historic rebound resulted from natural market fundamentals, or whether it was synthetically propped up by unprecedented actions taken by the Central Bank of the United States – The Federal Reserve. Similarly, many analysts attribute the rise of inflation to the drastic change of monetary policy set by the Fed.

For example, in 2010, the Fed adopted and instituted a never-before tested monetary theory defined as “Quantitative Easing”. This modern theoretical approach of creating money out of thin air led to massive amounts of capital being loaned out by the Fed through the purchase of U.S. Treasury Bonds from “market makers” – some within the same Wall Street financial institutional banks responsible for creating the housing bubble in the first place. The injection of massive sums of newly-created money (backed by nothing) into the market system has increased both our National Debt and money supply, devalued the U.S. dollar (presently designated as the world reserve currency), and set the stage for certain increases in inflation.

In conjunction with “quantitative easing,” the U.S. Fed and all other central banks cut interest rates to ZERO simultaneously across the globe, and has since kept institutional borrowing rates and fixed income yields (see the 10-year Treasury) at historically low levels. The lowering of fixed income yield rates redirected much of the standard purchasing flows out of the bond market (due to low yields) into equity markets, contributing to investor concerns that another bubble lies hidden within the stock market. Recently, the Fed Chairman signaled the likelihood of four upcoming interest rate hikes in 2022, with more expected in 2023. This led many investors to flee or trim overweighted equity positions, negatively impacting the stock market.

Also, in addition to the above, inflation has risen to levels unseen in 40+ years, eroding the safe haven of cash, and increased the cost of goods. Lastly, the inevitable consequences from a global pandemic, followed by global economic shutdown, have yet to fully shake out in the economy. Throw in supply chain issues, and geopolitical issues with Russia and China, and you begin to see why the bears could be slumbering out of hibernation in anticipation of market losses.

Here is the good news! The Farese Group team has a proven track record with over 20 years of experience helping our clients to not outlive their savings during retirement. We have planned and prepared for the worst-case scenario when establishing core objectives and selecting the investment vehicles to meet your retirement plan goals. We are on top of the situation and will continue to keep you up-to-speed on any future related information.

Do not forget to schedule your 2022 annual account review before the year’s end, and do not hesitate to call our office (or my cell) if you need anything before then. We value, and thank you for entrusting us to serve your retirement needs!