Handling Volatility in the Markets

Author: Matt Veenker, Director, Investment Management

Stock and bond markets are experiencing substantial change this year. The S&P 500 has entered bear market territory for the first time since 2020, and bonds are having their worst year in history. We believe there are several reasons for this change:

• High inflation – The U.S. economy is seeing substantial inflation for the first time in 40 years.

• Higher interest rates – As inflation persists, interest rates rise. This happens both as a result of the Federal Reserve raising short-term rates and investors looking for better yields in long-term bonds to offset inflation.

• Recession risk – The Federal Reserve is trying to create a “soft landing” that slows the economy down and reduces inflation pressures but not slow it enough to create a recession. The historical track record of achieving this is mixed.

• Consumer confidence – Consumers are seeing an uncertain future with inflation and may spend less as a result.

• Geopolitics – While there is limited impact on our economy now from war in Ukraine, investors worry potential escalation may cause a more substantial impact later.

The combination of these factors help contribute to the volatility in the markets.

So, what does this all mean? The reality is that this is somewhat normal for markets. Yes, it’s painful to go through, but there is purpose to this pain. Investors routinely become overly optimistic when markets go up. They fail to account for potential risks to their growth estimates. We then periodically see sell-offs as investors price in more risk and lower future expectations.

While we don’t know how much longer this bear market may last, there are important steps investors can take to manage this volatility:

• Assess your situation – Inventory your investments and make sure you are still positioned properly for the long-term. If you aren’t sure what that should look like, ask for help.

• Keep enough cash for short-term needs – If you have expenses coming up in the next couple years, keep enough cash to cover these. This applies to good and bad markets.

• Look for opportunities – Stocks are on sale! This doesn’t mean you should put all your cash to work buying stocks, but it is not likely a good time to be selling either.

• Step away – Focusing too intently on day-to-day market movements will only make things worse. Control what you can and don’t worry about the rest.

• Create/update a plan – This can be extremely valuable during volatile markets. Many investors are comforted when they see their portfolio stress tested for negative returns and realize they remain financially stable.

• Don’t make rash decisions – Market timing is difficult. Essentially, investors must make two correct decisions: Selling before the market declines; and then buying before the market rebounds. Timing the buy-in is particularly difficult as the bottom typically occurs when the economic news flow is most negative, and investors are the most nervous. Time IN the market is a bigger driver of investment performance than trying to time the market. Successful investors maintain a long-term disciplined approach and stay invested in a diversified portfolio with appropriate asset allocation.

We’ll have more to share in July in our Mid-Year Investment Update. That will include more details on the economy and our portfolios, and what the future might hold. If you have questions or concerns in the meantime, please contact your advisor.

About the Author

As a Director of Investment Management, Matt Veenker helps clients create investment portfolios to secure their dreams and goals. He is dedicated to guiding his clients toward sound financial decisions and lends his experience to help customers build a prosperous future.