We’re set for another rough day in the financial markets and, Alex and I have been grappling with the questions of how this started and why. We think we’ve found our answer by looking at our predictions at the start of the year and using a little bit of chemistry.
First, Our Initial Predictions
We started the year off with a host of mixed economic and earnings data. Our initial thoughts on this were that we would have a volatile year in the markets with about an even 50/50 chance of the S&P 500 ending up or down in the single digits. But (because there’s always a but) we felt that could swing solidly positive or negative if something happened to push feelings about the market one way or the other.
Now, the Chemistry
A catalyst is a substance that speeds the rate of a chemical reaction. It’s a term often used outside of chemistry to refer to person or thing that precipitates an event, and looking at where this most recent selloff started, we clearly see the catalyst as the Russian invasion of Ukraine. Although the invasion had little direct impact on the world economy in and of itself, it kicked off a chain reaction affecting banking, currency prices, commodities markets, and interest rates. In short, the invasion of Ukraine was the catalyst the markets needed to stoke pessimism in the world economy and drive a major global selloff. We are likely to see the S&P 500 be down 20% or more from the last high, making this a Bear Market, and there’s no way to know what the bottom will ultimately be and when that will happen.
Is There Any Hope in All This?
If you want to be in Finance, or even just in the financial markets, you need to be something of an optimist, so here are some signs that there’s hope. First, this is normal and normal is something we haven’t had in a long time. Normal means we can have a more consistent and rational market going forward, which is easier to invest in. Second, Bear Markets are rare. If this year ends with the S&P 500 down in the double digits, this will be first time that has happened since 2008, giving us hope for better markets ahead. Third, we’re seeing a reckoning in the bond markets as well, which has good long term positive implications for savers and retirees.
None of those points lead to things getting better anytime soon. But if we can lift our eyes to the horizon, we can see hints of better days to come if we hold our course through the storm. It’s never easy to see losses in our accounts, but there are signs that this short-term pain can lead to long term gain.