By Michael O’Connor

Stocks have rebounded in recent weeks after a rocky start to the year amid concerns about the Federal Reserve tightening monetary policy to fight inflation and the war in Ukraine.

At the very start of the year, money in the system and record low interest rates meant stocks kept climbing higher despite the brewing of some severe problems.

Evidence of inflation to anyone who fed their families or filled their cars was now beginning to appear in official statistics. Russia had started amassing troops on the Ukrainian border. These factors led to an inevitable market reaction.

In the weeks that followed, market pandemonium ensued. The tech-heavy NASDAQ index fell sharply and entered into a bear market, down 20% from its highs, while the S&P 500 fell 12.5%.

Equity strength returned in March, and the recovery has been nearly as spectacular as the decline that preceded it. The major indices have recouped roughly two-thirds of the losses sustained over the previous two months in a single month.

Despite the late comeback, all three major averages posted their worst quarter since March 2020. The Dow and S&P 500 declined 4.6% and 4.9% respectively, and the Nasdaq dropped more than 9%.

But we are not out of the woods just yet. Volatility is likely to persist.

Hindsight is 2020

It’s easy to look back now once we have experienced a significant run upwards and state that the market was oversold, and this decline was a buying opportunity, but I think that missed the point. It undermines the uncertainty that exists when war is raging and the value of your assets are falling.

The reality is, it’s not how much the market has fallen that scares investors, it’s how much it could fall. Every time the market falls a little, we worry it will fall a lot. It’s human nature.

Me telling you last month that corrections are a regular part of the market function, and we have seen three corrections of 10% or more in just over three years, doesn’t strip out the gnawing thought that this time might be different.

Unfortunately, stock investing isn’t free. Volatility and uncertainty are the mandatory entry fees if you want access to the high returns on offer.

The least satisfying but most prudent action here? Focus on your long-term objectives and forget the rest. There will always be a seemingly justifiable reason to sell, but history has shown that markets prevail.

Outlook

Volatility is likely to remain, but some sectors will absorb the impact better than others. Exposure to real cash-flow generating assets such as rental real estate is crucial.

Equity exposure should be focused on companies that can pass on rising prices to consumers without much disruption to their net margins. Think consumer staples and utility companies. Even if prices rise, we still need groceries and electricity.

Lastly, oil and energy companies, especially those that do not hedge away their price exposure, seem to be the obvious trade of the day. In recent years, there has been a lot of talk about the stranded asset risk of oil and the environmental consequences that must be considered. Still, without an immediate substitute available, our dependence looks set to linger on over the medium-term.