The stock market volatility: What you should know

Brian Nick, Chief Investment Strategist, shares his insights as to what is driving the recent market turbulence and how investors should think about it.

You may have seen the recent up-and-down activity in the stock market. Here’s a brief overview of what’s happening and why, what you should expect next, and what actions you might want to take. 

What’s happening? After closing at an all-time high on January 3, the S&P 500 Index has fallen just over 10%, led by stocks of many of the high-growth companies that performed best last year. Simultaneously, the U.S. 10-year Treasury yield has risen from its December 31 level of 1.51% to as high as 1.87% before retreating partially in recent days. Corporate borrowing costs have also increased modestly as financial conditions tighten, and the sharp – but likely brief – disruption from the Omicron variant is adding further uncertainty to the labor market and the broader economy. 

Why is it happening? Financial markets are reflecting a more balanced array of risks in 2022 compared to a 2021 in which “upside” surprises dominated. Specifically, the Federal Reserve has pivoted from very loose to somewhat tighter monetary policy in a relatively short period of time as it’s become more focused on taming inflation. Higher interest rates mean lower bond prices, and sharp increases in rates are often correlated with falling stock prices. Growth is set to slow in 2022 as fiscal stimulus unwinds and the post-vaccination consumer spending boom fades. These downside risks are increasingly finding their way into market pricing, though the S&P 500 remains close to its level from September 30. 

Where do things go from here? We’ve seen so-called “tantrums” – periods in which stock and bond prices are falling at the same time – before, most notably in 2013 and 2018. The good news is we continue to see a strong year ahead for economic growth, with consumer balance sheets still solid and businesses looking to hire and invest. When market volatility is driven by a lurch higher in rates, it tends to be short-lived and followed by periods of above-average performance in equity and credit markets. After all, the underlying cause of the selloff – concerns about economic policy becoming less helpful to the economy – is happening because the recovery to this point has been so strong. 

What do investors need to know? One of our chief concerns coming into 2022 was the fact that valuations across all markets looked high by historical standards. That’s less true today thanks to the rough January we’ve experienced so far. Investors should consult with their financial advisors before making any changes to their portfolios, but rebalancing should be a normal part of portfolio maintenance, especially for allocations that have drifted out of alignment with an investor’s financial goals. Overreacting to short term volatility can be harmful to long-term investment success, especially in light of what we believe will be a fruitful year ahead for diversified portfolios. 

TIAA is always here for you. As part of your retirement plan with us, we offer a range of solutions to help you pursue your unique financial goals today, tomorrow and through retirement. Contact us today to take advantage of our in-plan retirement advice.