U.S. and global stocks fell sharply Thursday as global interest rates rose and certain sectors posted weak earnings. The S&P 500 lost 2.4%, the Dow Jones Industrial Average fell by 1.5%, and the technology-heavy NASDAQ fell 3.7%, its largest one-day decline since September 2020.
Facebook parent Meta lost $252 billion in market value, the biggest one-day value drop in stock market history, after weaker-than-expected user growth and revenue reports. Several other companies have missed revenue or earnings estimates, revised down future earnings estimates, and/or cited compressed margins due to higher labor costs.
U.S. stocks: Earnings not providing the same lift
- Thursday’s selloff underscored that the quarterly earnings-report lift isn’t as strong as it has been during the past two years. Companies’ future earnings forecasts are not as strong as they had been, and fewer companies are beating earnings estimates.
- Low-quality and/or speculative market segments were hit even harder than the major averages. The bias toward higher-quality companies has continued to strengthen. The average stock within the Russell 2000 and NASDAQ indices has already experienced a 20% drawdown from a recent high.
Global stocks: International stocks declined less than U.S. stocks
- International stocks declined less than U.S. stocks on Thursday. Rising interest rates have been negative for stocks with expensive valuations, favoring less-high-priced stocks with more immediate cash flows.
- Central banks are moving in a hawkish direction, boosting bond yields and stocks in the Financials sector. The Bank of England on Thursday raised short-term rates by 25 basis points, its first back-to-back interest rate hike since 2004.
Bonds: Federal Reserve is likely to begin rate hikes in March
- With inflation at its highest level in decades and a strong labor market, a federal funds rate in the zero-to-0.25% range is no longer appropriate. We expect three to four rate hikes this year, fewer than the markets are currently anticipating.
- Interest rates for consumer loans, such as auto loans and business loans, may rise as the Fed hikes rates. Loans tied to short-term interest rates—like auto loans or credit cards—tend to be more sensitive to changes in the fed funds rate than mortgage rates, which are generally tied to long-term Treasury yields.
- We expect to see more volatility in the riskier parts of the bond market. As global central banks shift from easy to tight monetary policies, more-aggressive investments like high-yield bonds, bank loans, and preferred securities could see larger price fluctuations relative to the past 18 months.
Trading takeaways: Volatility rose
- At its current level around 24, the Cboe Volatility Index (VIX) is implying daily moves in the S&P 500 index of 56 points in either direction.
- Equity traders should consider reducing average share size and dollar amounts per trade, and exercise caution when trading in this volatile environment. While equities could experience another sharp rebound at any time, large downside moves could occur with equal frequency.
What should long-term investors do now?
Market volatility is unsettling, but historically not unusual. If you’ve built an appropriately diversified portfolio that matches your time horizon and risk tolerance, it’s likely the recent market drop will be a mere blip in your long-term investing plan.
However, it can be hard to do nothing when markets are rough. Given what has been happening recently, consider a few of our investing principles:
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Don’t try to time the markets. It’s nearly impossible. Time in the market is what matters. While staying the course and continuing to invest even when markets dip may be hard on your nerves, it can be healthier for your portfolio and can result in greater accumulated wealth over time.
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Build a diversified portfolio based on your tolerance for risk. It’s important to know your comfort level with temporary losses. Sometimes a market drop serves as a wake-up call that you’re not as comfortable with losses as you thought you were, or that a portfolio you assumed was appropriately diversified in fact isn’t. Schwab clients can log in and use the Schwab Portfolio Checkup tool to quickly assess whether their portfolio is still in balance with their target asset allocation. If you’re not a client, or haven’t yet established an investment plan, our investor profile questionnaire can help you determine your profile and match it to an appropriate target asset allocation.
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Build in protection against significant losses. Modest temporary losses are one thing, but recovery from significant losses can take years. Traditionally defensive asset classes, such as cash investments and short-term bonds, tend to perform better when stocks are down. When used for diversification, they can help buffer a portfolio against the effects of up-and-down markets. You’ll also want to consider defensive assets for shorter-term goals or accounts from which you expect to draw money within the next few years.
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Ignore the noise. It’s hard to shift your attention when headlines and TV news are focused on the market drop. However, markets historically have fluctuated and recovered. It’s important to stay focused on your plan and track progress toward your goal, not short-term performance.
© Charles Schwab
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