After nearly two years of strong performance despite the COVID-19 pandemic, stock prices have fallen across a variety of sectors in recent weeks. And on the heels of a decrease in real gross domestic product (GDP) – a measure of the total monetary value of goods and services produced in the economy – there’s a lot of talk about whether the stock market swings and uncertain conditions could lead to a recession. What’s behind this decline? Aaron Schaefer, Senior VP and Investment Officer Lead at Hills Bank, said there are several factors.

“The conflict in Ukraine has persisted, and has had economic ramifications in Europe and the U.S. that have exacerbated some of the inflation and supply chain issues we’ve seen recently,” he said. “On top of that, we’re coming off a large run-up in stock prices since the pandemic began. Governments around the world were aggressive in providing stimulus which helped the market bounce back quickly from the initial shock in 2020. But now, investors may be coming to realize that some of these stocks were overvalued.”

If stock prices and GDP do continue to slide, the country may be in for a recession – or at least a volatile stock market. But what does that mean for the typical investor, and what should you know about the risks and reward of investing in times like these? Let’s dive in.

What is a recession, and what does it mean for the market?

A recession, technically speaking, is when a country’s GDP declines for two consecutive quarters of the year. But the word can seem scarier than that definition, especially for those who only recently began investing in the stock market.

“After a few years of above average returns, people often forget that events like these are actually normal,” Schaefer said. “The average intrayear decline from a stock market high to its lowest point is about 14%, which is similar to the drop we experienced recently.”

A recession can extend the length of time that stocks remain in a slump. But the fear of a recession can often lead people to emotional decisions regarding their stock portfolio – which are almost always a bad idea.

What should I do with my stock portfolio in a volatile market?

A common sentiment in market conditions like these is to sell and try to recoup some of one’s initial investment. But the key to being profitable in the stock market is to stay invested, Schaefer explained. “Given enough time, this asset class (stocks) has historically rewarded your fortitude in the short term with an annualized 10% return on your investment in the long term.”

As for how this particular stock market cycle will shake out? Schaefer thinks trying to answer that question is beside the point.

“Even with the best trading systems out there, it’s really, really, hard to predict the market,” he said. “We’re not in the prediction business; we’re in the risk management business.”

By fine-tuning clients’ portfolios to their particular risk tolerance, expected retirement age, their goals, and other factors, Schaefer and the rest of the Hills Bank Wealth Management Group aim to help people sleep easier at night knowing that they can ride out the waves of the market.

“If you’re scared about the stock market, talk to your financial advisor about it. And if you don’t have a plan, get a plan,” Schaefer said. “A wealth management professional can help you manage your needs for the future without losing sleep over a stock market selloff.”

Start your financial plan with Hills Bank’s Wealth Management Group today.

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