Since roughly Thanksgiving, markets have been on a bumpy ride, prompting elevated levels of holiday heartburn among investors as we close out 2021.
Three sources in particular have impacted recent market volatility - the Fed, Omicron, and Emerging Markets:
- The Fed recently announced they believe the economy is strong enough to stomach a doubling of the pace of tapering – from $15 billion per month to $30 billion – and that the labor market is well on its way to full employment. This had an immediate impact on market volatility as people reacted to the news.
- The newly emergent Omicron strain and resurgence of a Delta wave around the country has market participants concerned that growth in cases could take a bite out of late Q4 and early 2022 growth and has some speculating it could delay a potential Fed rate hike liftoff once the taper is completed. The market hates uncertainty, and this unpredictable issue causes a round of volatility with each new headline.
- The ongoing collapse of the Turkish lira is threatening the overall health of Turkey’s financial system and market participants are reacting (recall the market turmoil around a potential Greek default and possible contagion several years ago), meanwhile news continues to leak out about China contending with growing defaults in the property sector (led by Evergrande) which accounts for a quarter of China’s economic activity, and Chinese/EM bonds have been in a bit of a freefall as a result.
While headline-driven short-term volatility can be disconcerting, markets have demonstrated the ability to digest the news, incorporate it into the prices of securities, and continue to flow along like a river meandering across the land. Long-term investors are best served by staying in the boat and riding it out to get to their final destination(s) in time.
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