The bad news – stocks closed out their worst month in years, as investors battled a host of headwinds, including monetary tightening from the Federal Reserve, rising interest rates, worsening inflation, COVID lockdowns in China and the ongoing war in Ukraine. The Nasdaq fell 13.3% in April, its worst monthly performance since the financial crisis in October 2008, the S&P 500 sank 8.8% for its biggest monthly drop since the onset of the pandemic in March 2020, and the Dow was down 3.9%.

The good news – Consumer spending continues to increase, growing 1.1% in March from prior month. Household spending is running ahead of inflation as consumers stepped up spending on travel and dining as well as gasoline and food. Personal income continues to climb as savings fell 6.2% in March, the lowest in nine months.

Why is the stock market plummeting when consumer spending makes up a majority of the growth in the economy?

Future Wealth’s View

The unfortunate reality of the consumer being a big part of the economy is that the consumer is not always rational. When the markets are doing well, year after year, buffeting one’s wealth, no one complains. But, at the first signs of a correction, panic sets in and the average investor begins to bail. The habit of looking at one’s portfolio every day to see if there has been an uptick in wealth, is such an addiction to most that even a modest correction appears to be the end of the world.

But is it truly the case? If one were to look at their portfolio over the past 5 years, assuming it was invested correctly, they would find that they are still doing well and sitting on gains. Earlier this year, we had cautioned that expecting double digit returns year after year is simply unrealistic. Just last week, our report was titled “Being cautious now is being wise”. Link is here:

In a segment of Game Theory in mathematics, there is state called Nash Equilibrium named after the famous mathematician – John Nash. Under the Nash equilibrium, a player does not gain anything from deviating from their initially chosen strategy, assuming the other players also keep their strategies unchanged. In the current stock market environment, if others are selling, following along with them would not be a judicious choice.

That said, in an increasing interest rate environment with inflation running high, sticking with growth stocks that brought much of the wealth in past years is akin to drowning a six pack of beer every night. It may feel good for a while but after some time, it just does not sit well.