No More Play Money

A very long investing party is ending, and a nasty hangover awaits. But maybe markets will start making sense again?

- Michael Mackenzie

Anyone checking their investment accounts at the moment will presumably recoil in shock—and then think about putting more money to work.

After all, history reveals periods of intense Wall Street fear are ultimately good buying opportunities, a pattern that’s duly nurtured a generation of investors primed to “buy the dip” during major equity and credit market routs. One of the most memorable, short-lived dips in asset prices was the pandemic low of early 2020, and that’s a good starting point for investors trying to make sense of what ails markets today.

The culprit stirring up market volatility and punishing asset prices isn’t hard to spot. A soothing tide of fiscal and monetary stimulus that started in 2020 is now retreating as central banks try to counteract the highest pace of inflation in four decades. The hawkish shift from the US Federal Reserve has been dramatic, with the central bank this month delivering its first half-percentage-point hike in 20 years. And that’s only the opening act. In June the Fed will start shrinking its $9 trillion portfolio, which was amassed buying bonds to help keep interest rates low.

The extent of this year’s losses in equities and bonds should hardly come as a surprise—no, really!—given that both asset classes began 2022 at very expensive levels. Because of hefty stimulus, both equities and bonds effectively borrowed from their future performance. So a reset in prices may be welcome, especially if you’re a young investor looking for better returns over the long haul. But let’s not get ahead of ourselves. Wall Street is renowned for taking the market elevator down several floors at a time and looking very cheap before a bottom is truly established.