Volatile Markets Need Perspective, Not Panic.
While volatility is inevitable in investing, it still creates investor angst – but it can also create opportunities for those willing to look beyond the temporary.
When markets turn volatile, we believe that adhering to a long-term financial
plan is better than reacting impulsively and that attractive opportunities may be
best discovered through active management and broad diversification.
Volatility returned with a vengeance in early February and the S&P 500 experienced it first official correction in two years, awakening markets from an unusual calm that had been in place for a long time.
The spike in volatility and the correction that accompanied it were not completely surprising, however. Many believed markets had moved up too far too fast and had been too quiet for too long. In other words, a healthy correction was overdue.
S&P 500 and VIX (December 29, 2017 – March 2, 2018)
Source: Bloomberg, as of 3/02/2018. Past performance is no guarantee of future results. This chart is for illustrative purposes only and does not represent an actual investment. Unmanaged index returns do not reflect any fees, expenses or sales charges. Indexes are unmanaged and investors cannot invest directly in an index.
Yet the outlook for continued economic expansion and corporate earnings growth still looks solid, suggesting the probability of near-term recession is low. In our opinion, that calls for patience as this tug-of-war plays out between short-term price momentum and long-term fundamentals.
Interest rates have moved higher this year and are an oft-cited catalyst for the market correction. However, the rise in rates, while consistent with an uptick in growth and inflation expectations, does not represent a fundamental change in the long-term inflation environment, in the opinion of our investment managers.
Of course, no one knows what the future will hold and even when economic fundamentals are positive there are numerous risks to consider. For example, present valuations in stock and bond markets remain generally elevated as the economy nears its ninth year of recovery, which calls for a selective approach to investing. And with the Federal Reserve under new leadership, markets will be keenly focused for signs that Fed policy could shift from its current course.
You can’t diversify uncertainty…
It’s true that volatility can spook investors, but don’t let temporary market conditions derail your long-term investment plan. Panicking can lead to decisions that result in unnecessary losses, which can impede long-term potential.
…but you can diversify risk
Broad diversification can help to mitigate overall portfolio risks, and when markets get bumpy, valuation discrepancies may emerge between securities, sectors and asset classes, enabling active, value-oriented investors to make new acquisitions at lower prices or to lower the average cost basis in existing holdings.
The rise in rates, while consistent with an uptick in growth and inflation expectations, does not represent a fundamental change in the long-term inflation environment.
Get Perspective On Volatility
Stock Sell-Off: Fears VS. Fundamentals
Elevated valuations, investor complacency and the prospect of faster-than-expected inflation combined to trigger the equity selloff this week–but with economic fundamentals still solid, our investment managers counsel patience amid the...
Volatility: Is Inflation Really the Issue?
While some point to inflation fears as the trigger for current volatility, our investment managers question whether those fears may be exaggerated, given economic realities.
Sell-Off Overlooks Solid Long Term Trends
The current sell-off is overdone, notes Investment Strategist Jeff Schulze: inflation fears have been heightened by investor complacency, and the market can handle higher rates if the rise is not too rapid.
Healthy Correction: The Return of Volatility
Ultimately, we believe this market correction is healthy. While clearly painful in the short term, it is building a base from which the global risk markets can not only recover but do well over the coming year or two.
The Fed and Current Market Pricing
The transition from Janet Yellen to Jerome Powell as chair of the Federal Reserve (Fed) is happening at an interesting moment for financial markets and the U.S. economy.
All investments involve risk, including loss of principal. Past performance is no guarantee of future results. Please see each product’s webpage for specific details regarding investment objective, risks associated with hedge funds, alternative investments and other risks, performance and other important information. Review this information carefully before you make any investment decision.
Diversification does not guarantee a profit or protect against a loss.