Market’s Down: Why and What to do?
Over the past week, Dalton and I have received several call/emails all centered around the current market price swings.
My attempt in this post is to articulate to all our clients what’s happening in the market.
As a quick overview, the S&P 500 is down YTD -3.89% as of Jan 18th.
What’s driving the stock market lower?
Primarily, it’s interest rates and inflation. Which then begs the question, why are interest rates and inflation driving down stock market prices?
When you think of stock market values, the fundamental source of these values is based on future cash flows from the business, which are then discounted because these cash flows are in the future, not today’s cash flows.
The rate at which these cash flows are discounted is based three different variables:
1. Risk-free rate: The risk-free rate is the yield, or interest rate, that is provided by a very “safe” asset - the primary asset used for this pricing is the 10 year treasury note.
2. Inflation: Because we’re talking about future cash flows, the value of future cash flows is reduced when inflation is higher because your future cash won’t be able to buy as much
3. Asset Risk: How risky is the asset? How strong is the company? Etc…
In the past few months, we’ve seen all three of these at play.
Risk-free rate: When the Federal reserve talks about increasing interest rates, that has historically increased the yield on “safe” assets. This in turn increases the attractiveness of these assets and reduces the potential positive spread between stocks and risk-free assets.
Inflation: As just reported by BLS.gov, the 12 month inflation rate was 7%. This is another head-wind when thinking of future cash-flows because the cash in the future now has a reduced purchasing power.
Asset Risk: Since the Financial Media is paid to sell ads, they will always have a disaster waiting for us when we wake up. If it’s not Covid, it’s interest rates, or taxes, or political unrest, or something else.
So what are we, as your Wealth-Management firm doing about this?
As I commonly say, we can’t control outside events, we can only control our response to what happens around us. With that in mind, this is exactly why we’ve been positioning more assets into “Value” oriented investments over the past year. “Value” style investments typically have a lower P/E ratio and are less impacted by the above changes. Just know we’re on it!
What should you, as a client, be doing about this?
We build financial plans to work toward aligning your wealth with your long-term goals. We then design an investment allocation for you to match these goals. If you are not certain that your financial plan or your investments are aligned with you goals, please contact us today: Schedule a Meeting
Part of our mission is to help our clients stop second-guessing their financial decisions and start living financially confident lives. You have every right to be confident with your financial plan. If you don’t feel this confidence, we need to talk immediately.
Should you have any questions whatsoever, please don’t hesitate to reach out. Dalton and I aren’t mind-readers!
-Dave
Cedar Wealth’s Facebook | Cedar’s YouTube Channel
David Hobbs, CFP®, CLTC | Wealth Advisor | Founding Partner
Offices in Indianapolis & Terre Haute
Office: 317-559-2940
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Email: D.Hobbs@CedarWealthPartners.com
www.CedarWealthPartners.com
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