Equity markets in the U.S. fell sharply again on Monday, with the S&P 500 off approximately 4.1%. This comes on the heels of a rough stretch last week where the index finished lower by 3.9%, its worst weekly performance in two years. Global markets also have traded lower in sympathy.
Although pinpointing a specific catalyst for a decline is always difficult, it appears investor angst over the recent run-up in bond yields is the key variable. The yield on the 10-year U.S. Treasury note, which started the year at 2.41%, climbed to a roughly four-year high of 2.84% Friday on the prospects for stronger economic growth and higher inflation. This may call into question expectations that the Federal Reserve will raise its policy rate (the federal funds rate) only three times this year.
Although such a decline may be disconcerting to investors, it is important to keep the following points in mind:
When looking at a chart of long-term equity market performance, declines like those experienced last week are barely perceptible. Investors should focus on their long-term investing objectives because even if this ends up being the beginning of a meaningful correction, stocks remain the best way for investors to build wealth over time.
If this decline has you questioning your willingness and ability to tolerate a further meaningful drawdown in stock prices, it is important to discuss this with your adviser. A nine-year bull market that has experienced few sizable pullbacks can lull us into complacency with respect to our true risk appetite. It’s not too late to reassess.
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