Why Markets Might Remain Volatile

A month ago, we outlined several factors driving uncertainty in financial markets: inflation, interest rates, supply chains, and geopolitical uncertainty. In recent weeks, those uncertainties haven’t abated. In fact, some corporate earnings reports and forward-looking guidance from large retailers have heightened concerns about a recession.

We should remember that there are also solid fundamentals in the U.S. economy. Job-seekers have plenty of job openings to choose from, and consumer spending has not fallen despite high inflation. In the midst of the mixture of good and worrisome news, the Federal Reserve is seeking to strike a fine balance between raising interest rates enough to slow inflation, but not so much as to cause a recession. The S&P 500 ended the month of May around where it started the month, and bonds had slight positive returns. However, we are far from sitting in a “holding pattern.”

Going forward, we should keep a level head and recognize that fears of recession don’t necessarily predict actual recessions. For example, Google Trends reports an increased frequency of searches for “recession” in recent weeks. However, there was an even higher frequency of “recession” searches in August of 2019. No recession actually developed (until the pandemic in spring of 2020, which no one could have predicted).

At this point, the numerous economic uncertainties may each see either good or bad surprises, which means that markets may continue to see large movements up or down on any given day. Also note that the news on any given day may affect bonds, U.S. stocks, international stocks, or any combination of them.?When uncertainty is high, it’s more important than ever to maintain a well-diversified portfolio.?Investing carries risk, but you want to spread out that risk in order to protect from big losses while at the same time positioning yourself to benefit from the good returns wherever and whenever they arrive.