by Jordan Hucht, CFP®, ChFC®, AIF®

Volatility is back with a vengeance, inflation is stickier than hoped, the Fed is becoming more hawkish, pandemic-altered spending isn’t over, and geopolitical risks have risen. What does all this mean? For starters, it means that the start to 2022 has been ugly for markets and is proving that this year’s playbook will look different than last year’s. Is this all bad news? Not necessarily.

First, let’s remember that coming out of the pandemic, the markets have come a long, long way, rallying on an extremely accommodative Fed, record-setting amounts of fiscal stimulus from Washington, resilient corporate profits, and optimism for the return to normal. In that environment, with cheap money and abundant liquidity, investors piled into stocks, driving the major averages to record highs and certain assets into the stratosphere, where they were bound to eventually come back to earth. In some cases, fundamentals and valuation were an afterthought to mere price momentum.

Over the past few weeks, we’ve seen the major averages, led by the Nasdaq, on their steepest declines in nearly two years. And if you look beneath the surface, many of those aforementioned pockets of excess have blown up, losing 50%, 60%, 70%, or more of their value. As painful as that can be for investors overexposed to speculative investments, I’d argue that there’s some good news in there. Having more rationality in the market and an environment where fundamentals and valuation again matter is a healthy development. Speculative excess is unhealthy and unsustainable.

So what caused this change in sentiment? To oversimplify the situation, it’s the trifecta of (1) the Fed moving into a tightening cycle to combat inflation, (2) Omicron slowing the pace of the “reopening” and possibly economic growth, and (3) rising tensions in the Russia-Ukraine situation.

To expand a bit on each:

It’s long been expected that Fed policy will change and rates will rise, but inflation has proven stickier than the Fed had hoped, so the market is now coming to grips with the potential for more aggressive movement by the Fed than perhaps expected.

Similarly, economic growth last year was red hot, and the expectation had been for it to cool off a bit this year. But there are signs that Omicron and other factors could be leading to a slower-growing economy this year than many expected.

And the escalation of military presence on the Russia-Ukraine border is unnerving investors because of the economic ripple effects of the potential conflict.

So what happens next? As we get further into earnings seasons over the next few weeks and the Fed gives more clarity on policy thought, the market is likely to continue to be volatile. The Russia-Ukraine situation adds an additional level of uncertainty that can further rattle or aid in settling markets, depending on the developments. It’s been an abnormally long time since we’ve had this kind of volatility, and as uncomfortable as it can be, we need to stay disciplined, stay diversified, and keep a long-term focus.

Volatility like this is a normal part of investing, and though every bout of volatility is different, each presents its own, unique set of challenges. But I’d also suggest that every bout of volatility also presents a unique set of opportunities, and I believe this one to be no different. You can’t paint this picture with a broad brush, but I believe there’s a mixture of good news and bad news swirling around on the canvas of 2022.

As always, it’s critical to understand the timing and cash flow needs from a portfolio, which is why thoughtful, long-term financial planning should dictate asset allocation and portfolio management. All asset classes – stocks, bonds, cash, and others – play an important role in a portfolio and in a financial plan. With proper planning, you can find comfort in an otherwise uncomfortable time.

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Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results.