Quick takes on capital markets

08 Apr 2022

Q1 recap: Markets stabilize despite ongoing Fed fears

Despite the tumultuous start to the year, markets are yet again displaying signs of resiliency to another correction. For investors, who are now adjusting to a faster pace of Fed tightening and balance sheet reductions, it’s important to stay invested and not overreact to short-term events.

U.S. stock market performance over three time periods
S&P 500 price, indexed to 100

U.S. stock market performance over three time periods chart
Source: Clearnomics, Standard & Poor's, Principal Global Investors. Data as of April 6, 2022.

Investors faced historic challenges during the first quarter as markets fell into correction territory. From red hot inflation to a Federal Reserve (Fed) rate hike, Russia's invasion of Ukraine to rising oil prices, investors were forced to adjust to rapidly changing conditions. Year-to-date through April 6, the S&P 500 is still down 6%, the Dow down 5.1% and the Nasdaq down 11.2%.

Despite this, markets stabilized and began to bounce back during the final weeks of the first quarter. The S&P 500 has regained 10.4% since mid-March alongside other major indices. As they tend to prove repeatedly, markets, with time, will adjust to new developments.

Investors ought to keep this in mind as markets once again face Fed concerns. An increased pace of policy rate hikes, balance sheet reduction, and even a yield curve inversion, are testing the patience of investors.

However, the past several weeks highlight how swiftly markets can rebound from shocks and corrections. While these inflections can occur unexpectedly, the market has historically recovered within four months. This is a reminder that investors should thoughtfully consider the impact of rising rates on their portfolios, stay focused, and not dwell too much on day-to-day Fed headlines.

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