Weekend Reading: Why the Market is Bouncing

This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
Weekend reading why the market is bouncing Weekend reading why the market is bouncing
Weekend Reading

The first half of 2022 saw the second-worst performance of a 60/40 portfolio of stocks and bonds in over two centuries. Despite this, however, something still holds true: In combination, stock and bond markets naturally form an equilibrium.

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Reaching a “new normal”: Between tumultuous activity, inflation and the Fed raising interest rates, it’s been a hard-hit year for many. Additionally, the Fed has been in talks of bringing down the money supply, while also letting “their $9 trillion portfolio of Treasury and mortgage bonds mature without replacing them with new bonds.” As a result, worldwide banks and investors have learned to adjust to our new “equilibrium”, which becomes a continual oscillation (up and down, back and forth), or a process which we never finish going through.

Building up for a bounce-back? As blogger Joshua Brown says, “Volatility in the investment markets is a sort of damped oscillation in which the force that caused the volatility cannot be sustained indefinitely.” This is due to investment demand. Eventually, investors need returns above what the risk-free rate can provide, and a reversion occurs. Trillions of dollars need a home, a new stock-bond mix of risk and security is found and we find an equilibrium in which we can all breathe.

Don’t put the cart before the horse: The market hasn’t officially “bounced” toward a recovery, and you shouldn’t take it as such. There are more forces at play in the short-term that should be considered.