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To say the market has been on a roller coaster ride over the past two months would be an understatement.

The S&P 500 has moved up or down by one percentage point in 56% of days since the start of March. On a year-to-date basis, the index has declined by 13% through Thursday’s close, and it has spent the majority of the past two weeks in a correction (defined as a decline of 10.0% to 19.9%).

For investors, the wall of worry continues to grow taller. Front and center these days are the increasing beliefs that growth will slow and stagflation will materialize. While earnings growth expectations have yet to reflect this perception, the path of inflation remains unclear, and some weaker-than-anticipated economic data points are building to support the idea of slowing growth. A heightened level of uncertainty regarding the customer in the face of higher interest rates and hot inflation doesn’t help either.

Oh, and we can’t forget the Fed’s unprecedented pace of rate hikes, or the wild cards of geopolitics and China’s COVID crisis. There’s a significant amount of uncertainty in the market these days, and it’s hard for many to see a positive path forward. Investors are confused (you aren’t alone!), and the market has become more volatile.

While it could remain this way for a while, history may offer some comfort. The average correction over the past 75+ years is about 14%. Perhaps coincidentally, that is about where the index is today. Historically, the market takes about four months to recover fully from a correction.

While it’s hard to say when the bottom in the market will be, in times like these, it’s good to step back from the day-by-day stock market volatility and assess how key economic drivers are shaping up.

Are we due for a recession?

Last week we learned that the first quarter’s gross domestic product (GDP) growth rate was negative for the first time in two years. That drove increased chatter about the potential for a recession. Digging deeper into the composition of GDP, the contraction was due to the U.S. importing more goods than economists forecasted (all those goods stuck at sea). However, consumer demand was strong enough to stymie net exports – an important factor in calculating GDP. Most economists predict a bounce back to growth for the balance of the year, but they haven’t written off a recession in 2023.

Graph titled Q1 GDP Surprise shows quarterly GDP growth in percentage from Q1 2015 through expected growth in Q4 2022. Between Q1 2015 and Q4 2019, growth was between 0.0% and 5.0%. Growth dropped to -5.1% in Q1 2020 and -31.2% in Q2 2020 before rising to 33.8% in Q3 2020. Between Q4 2020 and Q4 2021, growth remained between 0.0% and 7.0% before dropping to -1.4% in Q1 2022. Economic growth is projected to return in 2022 with expectations at 3.0% (Q2), 2.5% (Q3) and 2.4% (Q4). Source: Ally Invest, Bloomberg (estimates as of 5/6/2022).

But what are other indicators signaling? We see some cautionary data points, but also metrics that paint an optimistic picture.

A growing list of uncertainties

A key question for many investors is how big of a hurdle a quickly rising interest rate environment is going to be for stocks to overcome. Currently, the market expects the Fed’s short-term policy rate to touch about 3% by year-end, a level not reached in the last tightening cycle. Historically, the S&P 500 has declined about 3% in the 12 months following the start of an aggressive rate-tightening cycle. Based on that, it could be possible that the market has overshot to the downside on interest rate expectations.

Also high on the list is whether inflation has peaked or not. There are signs to keep me optimistic that inflation may begin cooling off in the coming months, but the rate at which that occurs remains highly uncertain. Next Wednesday, the latest consumer price index (CPI) will be released, and economists are expecting a slight tick higher in core CPI.

There are still many forces working against the need for price declines: the Russia/Ukraine conflict, supply chain issues and elevated wage growth.

Inflation plays a key role in the concern for a growth slowdown. Its impact on the consumer has many worried, though significant changes in their behavior haven’t yet materialized. A stalling or some moderation in other economic data has raised concerns about an economic slowdown and stagflation. In the past week, worker productivity fell sharply, and a shift in activity to the services sector from manufacturing is being negatively impacted by supply side issues.

It’s a lot to digest. Fortunately, there is another side to every coin.

Sources of optimism

Corporate earnings growth continues to come in strong. Through Thursday, 78% of S&P 500 firms topped analyst profit expectations. Furthermore, fewer companies are cutting their guidance than in the past two quarters, which is impressive given all the macro concerns listed above. The consumer is also still in good shape. While the U.S. personal savings rate has fallen, it’s simply back to its pre-pandemic trend after spiking in 2020 and 2021 because of fiscal aid packages. Plus, debt-to-income levels remain low for consumers, and the unemployment rate is historically low.

The Conference Board’s Leading Economic Index®, an indicator of economic expansion, continued to increase in March. There are bright spots in the grey skies.

The bottom line

The uncertainties seem to outweigh the positives these days, and markets could remain rocky until clearer skies prevail. Keeping with your long-term strategy is the most important thing right now. Selloffs don’t last forever, and market setbacks are typically followed by eventual recoveries. Remaining consistent through tough periods like this could help set you up for success on that other side. Volatile days can feel uncomfortable, but they often present unique opportunities to enter the market.

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Headshot of Lindsey BellLindsey Bell, Ally’s chief markets & money strategist, is an award-winning investment professional with a passion for personal finance and more than 17 years of Wall Street experience. Bell’s unique ability to connect the dots between data and real life and craft bite-sized money ideas that people can use and apply stems from her deep background as an analyst, researcher and portfolio manager at organizations including J.P. Morgan and Deutsche Bank. She is known for demonstrating why and how an understanding of all things money improves a person’s finances and overall well-being. An ongoing CNBC contributor, Bell empowers consumers and investors across all walks of life and frequently shares her insights with the Wall Street Journal, Barron’s, Kiplinger’s, Forbes and Business Insider. She also serves on the board of Better Investing, a non-profit focused on investment education.

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