Markets are forward looking

There has certainly been increased chatter about a looming recession, but it's important to remember that the stock market is not the economy and a future recession doesn’t necessarily mean the stock market would perform significantly worse. That’s because the price of a stock represents a prediction of the company’s future earnings. Investors around the world collectively synthesize all available information about a company, the economy, and their future expectations, which is then reflected in a stock's price. 

Currently, investing experts are expecting companies will become less profitable — whether that be from a full-blown recession or simply a mild one from ongoing inflationary headwinds. Since a degree of economic slowdown is overwhelmingly expected, stock prices have already declined considerably to reflect the market’s expectations of the future. Said another way, the probability of a recession has already been ‘priced in’ to a certain degree.

Surprises are not always to the downside

A lot of bad news has already been priced in this year. That does not mean that expectations about the future couldn’t worsen and cause further market volatility, but there is certainly room for positive surprises as well. If inflation cools, rate hikes slow demand without significantly affecting the labour market, or the war in Ukraine shows any step towards resolve, markets could pleasantly surprise us with a tip to the upside. It may not feel like it, but eventually market pessimism reaches a turning point and becomes more optimistic, raising spirits and asset prices too.

Stocks remain an excellent long-term investment

During periods of volatility, it’s easy to forget the long-term growth that stocks have generated. Take comfort by looking at a chart of a particular stock market index — the value of which would have clearly risen over time. Sure there are declines along the way, but zooming out and focusing on the fact that stocks have generated annual returns in the 8 to 10% range over the past century can be reassuring. This period certainly included many miserable moments including the Great Depression, two world wars, pandemics, and a variety of other crises. That said, the markets always recovered their losses and continued their march upward and onward, rewarding patient investors in the process. 

It’s worth noting that returns of the US stock market as represented by the S&P 500 over the past three years were clearly above average at 31%, 18%, and 29% for 2019, 20, and 21 respectively. This brought the average 10-year return to nearly 14% — a figure well above the long-term average. Unfortunately, a pullback was to be expected (although never welcomed). Seldomly has the market delivered its average return in a given year; rather, it has historically posted many spectacular years, several ‘meh’ years, and the occasional ‘disaster’ year.

Bond yields are looking far more attractive

What has made this market decline particularly nasty is the fact that bonds have also been in a serious rut as well due to inflation and rising interest rates. The silver lining is that bonds now have some yield to offer investors and appear far more attractive long-term investments than they were prior to this downturn.

Ensure you have a financial plan in place

A good financial plan balances your goals with your risk appetite, time horizon, and preferences. It also makes allowances for adverse market conditions — such as those we’re witnessing — so you can take comfort in knowing that these periods of volatility have been accounted for. If you don’t have a plan, this may be a perfect opportunity to begin working with an advisor to establish one.

Remind yourself why you're investing

This is understandably a worrisome time and there is no denying the significant emotions that surface when seeing your investment portfolio value decline. The combination of losing wealth and feeling powerless to stop it can be very challenging. Focusing instead on why you’re investing can help dissipate these feelings. Remember that saving, investing and riding out the discomfort of volatile markets are deliberate choices you make in order to help reach your goals in the future.

Avoid market timing and stick to your plan

Attempting to get out of the market before further declines and jumping back in once the coast is clear may sound like a prudent strategy, but more often than not, it will end up making a bad situation worse. This usually turns a paper loss into a real one, while missing out on the opportunity to fully participate in the rebound once it arrives. Unfortunately, the only way to guarantee your portfolio will generate the long-term expected returns your goals rely on, is to continue holding your portfolio during the good times and the bad. Feeling discomfort and resisting the urge to take action is the required cost for investment success.