By: Jim Brown, CFA - Senior Portfolio Manager & Research Analyst
What happened yesterday? The S&P 500 went down more than 4.3%, the largest one day drop since June 2020.
Why the big drop in stock prices? U.S. consumer price inflation, as measured by CPI, rose 0.1% in August versus expectations of a 0.1% decline. Compared to the last year, consumer prices were up 8.3% versus the anticipated 8.1%. These increases occurred despite the 0.75% increase in interest rates announced at the July meeting of the Federal Reserve Board (Fed), which was their fourth rate increase since March. Market participants had been hoping for more of a decline in consumer inflation, prompting fears of even higher Fed rate hikes in the months ahead.
Should this prompt equity allocation changes in portfolios? The long-term focus for your portfolio means that it is constructed to weather market volatility. Your financial planner has worked with you to identify your cash needs over multiple years. Assets supporting your cash needs are not invested in equities, but in lower volatility asset classes such as cash, short-term fixed income, or market neutral alternatives. As such, we are not forced to sell stocks during these market declines (which would lock in losses). During market conditions such as this, the investment team will also look for opportunities to purchase securities that have strong fundamentals at more attractive prices and incorporate other tax saving strategies.
What is the long-term outlook? When looking at data since 1980, the S&P 500 has seen an average decline of 14.0% during the calendar year, yet annual returns ended up being positive in 32 of those 42 years. Without even including dividends, the S&P 500 is still up more than 16% from the pre-pandemic high seen in February 2020, up 31% from June 2020, and still slightly higher than just 1 week ago. While it is sometimes difficult to keep this in mind on days such as yesterday, please remember that maintaining exposure to the market (time in the market) is a much more effective tool for building wealth that attempting to predict when to jump in and out of the market (timing the market).
What to do if you still have concerns? As always, your team of professionals at Buckingham Advisors is here to assist with your planning, tax, and investment needs. If you have any questions, or if your circumstances have changed, please reach out to us.
Jim Brown, CFA
Senior Portfolio Manager & Research Analyst
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.